Bonds payable are the type of debt issued by corporates, secured institutions, government, etc. for the long term. In this agreement, the user of bonds makes a formal agreement to pay interest to the bondholder semi-annually and to make payment of the principal or the matured amount on a particular future date.
Bond payables is an assurance set to pay bond holder with some interest along with the principal amount on its maturity on a fixed date. These are issued by corporates or the government to generate cash. The company or the bond issuer is the borrower.
When a bond is issued it creates a liability. So, bonds payable appear on the liability side of the balance sheet of the business financial records. Bonds payable are categorized under the long-term class of liabilities. Generally, interest on bonds will be paid on basis of semi-annual. Bonds are issued at:
Types of Bonds Payable
Let us see the 10 types of bonds payable which are commonly used.
Fixed Rate Bonds
In this Fixed Rate bond, the interest rate will be the same throughout its tenure. Fixed-rate bonds are resistant to changes and swings in the market, because of the overdue to a constant interest rate.
Zero Interest Rate Bonds
In Zero Interest Rate Bonds, you do not need to pay any regular interest to the investors. In this type of bond, issuers only pay the principal amount to the bondholders.
Floating Rate Bonds
Floating Rate Bonds have a oscillate interest rate (like coupons) as per the current market reference rate.
Inflation Linked Bonds
Inflation Linked Bonds are where bonds are linked to inflation. The interest rate of inflation-linked bonds is less than that of fixed-rate bonds.
Perpetual Bonds are bonds with no maturity date. Perpetual bond holders will enjoy the interest rate throughout the term period.
Subordinated bonds are the bonds given less priority as compared to other types of bonds of the business in case of a close-down. In such cases of liquidation, subordinated bonds are given less importance as compared to senior bonds which are already paid at first.
War bonds are issued by the government to raise funds in cases of war.
If the bond certificate is stolen or misplaced by the bondholder, anyone else can claim the bond amount with the certificate. Because bearer bonds do not carry the name of the bondholder, anyone who possesses the bond certificate can claim the amount.
A serial bond is structured so that a portion of the bonds mature at regular time intervals until all the bonds have matured.
The government will issue these climate bonds to raise the funds when the country concerned faces any unfortunate changes in climatic conditions.
Advantages of Bonds Payable
Here are some of the advantages of bonds payable:
- When bonds payable are issued the user can enjoy the tax benefits.
- Bonds payable will help in raising emergency funds required for capital enhancement and expansion.
- For governments or corporates, bonds are secured tools for backup, when any financial disturbance occurs.
- Compared to stocks, bonds are generally less volatile and less risky for your business.
- Bonds are rated by credit agencies based on their risk profile.
Bonds Payable: Balance Sheet Liability Accounting
In Bonds payable, it represents a contractual obligation between a bond purchaser and bond issuer.
Generally, the interest rate on bonds is paid on a semi-annual basis, i.e.: every six months until the date of maturity. The exact term of bonds will differ from case to case and are it is stated in the bond indenture agreement.
Bonds Payable: Current Vs Non- Current portion
The bonds payable can be found in the liabilities section of the balance sheet. Since bonds are financing instruments that represent a future outflow of cash. For example, the interest expense and principal repayment in bonds payable are considered liabilities.
Depending on how the maturity date is far from the present date, bonds payable are often segmented into “bonds payable, current portion” and bonds payable, non-current portion.”
|< 12 Months
|Non- current Portion
|> 12 Months
As we discussed above, we saw how bonds payable benefit both the bond issuer and the bondholder. Also, we discussed the various advantages and different types of bond payables and how they are useful to bondholders.