Understanding trends in an organization’s assets, liabilities, and equity is crucial to evaluating financial health because these components always balance. It’s essential to analyze how the elements of the basic accounting equation change over time, with a focus on the Liabilities section of the balance sheet, where debt terms play a significant role.

This article explores the principles of accounting for long-term liabilities, typically consisting of loans or bonds meant for extended repayment.

Current and Non-Current Liabilities

Current liabilities are obligations expected to be settled within 12 months of the balance sheet date, while non-current liabilities—such as long-term debts—are due beyond 12 months. This section primarily includes financial liabilities or borrowings repayable over several years, where understanding debt terminology is crucial.

Key Bond Financing Terms

When companies need funding, they frequently issue fixed-income securities like bonds and notes to investors to obtain the necessary capital. In exchange, firms borrow money with a commitment to repay it later, which is the essence of the bond’s debt terms. Essentially, the issuer secures immediate cash but also incurs a future repayment obligation to capital providers. Accounting-wise, bonds are treated similarly to loans—albeit with certain specifics.

A “bond” refers to a formal debt agreement in which the bond issuer borrows money by issuing debt securities to raise capital. These securities typically create a financial obligation recorded under non-current liabilities on the balance sheet.

The bond’s issue price is the initial sale price offered to investors. If this price is above the bond’s principal or par value, the bond is “trading at a premium.” Conversely, when the issue price is below the par value, the bond is “selling at a discount.” 

The principal or par value—the face, nominal, maturity, or redemption value—represents the loan amount the issuer promises to repay investors, aligning with the bond’s debt terms.

The repayment or maturity date marks the point at which the issuer is obligated to redeem the bond by repaying the principal amount. The bond’s term, defined as the period between the issuance date and the maturity date, can range from overnight to 30 years or more, with longer terms typically classifying bonds as long-term debt securities.

Bond Pricing and Costs

A bond’s price is typically quoted as a percentage of its par value. For instance, a bond with a face value of $1,000 priced at $800 would be quoted at 80%. If the par value is unspecified, it’s generally assumed to be $1,000.

Issuing fixed-income securities incurs transaction costs, such as legal and accounting fees, sales commissions, and printing expenses. Under typical financial reporting standards, these issuance costs reduce the bond’s issue price. For instance, if a firm sells securities for $10,000 but incurs $500 in costs, the net proceeds are $9,500. Consequently, the company receives and records $9,500 in cash and liabilities, reflecting another aspect of the bond’s debt terms.

Coupon Rates and Payments

A bond’s coupon rate—directly linked to its par value—represents the periodic interest paid annually until maturity. In addition to the principal repayment at maturity, borrowers regularly make coupon payments, enticing investors to engage in such agreements for potential profits. For example, a bond with a 6% nominal fixed coupon rate and a $1,000 par value will yield $60 in annual interest, as the rate is a percentage of the par value.

While the quoted coupon rate typically represents the annual payment, coupon frequencies can vary—annually, semi-annually, quarterly, or monthly. For a $1,000 par value bond with a 6% fixed coupon rate and semi-annual payments, two interest payments of $30 each (3% of par value) occur on specified dates each year.

Debt Terms: Key Takeaways

In summary, a bond essentially functions as a loan for your company. It is characterized by its principal amount, or face value, and a fixed interest, known as the coupon payment. Investors favor bonds because they provide a steady income stream through scheduled coupon payments and guarantee full principal repayment upon maturity.

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