What is Bonds Payable?

Bonds Payable word can be broken into two parts – bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period.read more and payable. As you can understand, bonds are debt. And payable means you are yet to pay that amount. So bonds payable stands for debt that’s not being paid.

Specifically, bonds payable is a long-term debt that has remained outstanding.

As we note from above, Durect Corp had Bonds payables in its current liabilityCurrent LiabilityCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They’re usually salaries payable, expense payable, short term loans etc.read more and long-term liability sections.

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How does Bonds Payable Work?

A company issues IOU (“I owe you.” An IOU is a signed document acknowledging a debt. The investors buy this issued IOU instead of cash. In simple terms, the company is borrowing money from the investors by issuing them a legal document that states that the investors would get paid the full amount with interest in due time.

Two things that we need to pay heed to in the case of bonds payable –

  • First, once the company issues bonds to the investors, the company needs to pay the interest to the bond-holders semi-annually (or every six months). The interest rate would be decided beforehand, and the company needs to pay the pre-determined amount as the interest charges.Second, the company also needs to ensure that it pays off the full amount at maturity.

Bonds Payable Example

Below is an example of Nike’s Bond of $1 bn and $500 million issued in 2016.

source: sec.gov

We note the following about Nike’s Bond.

  • Par value – The amount of money paid to the bondholders at maturity. A bond is issued in the denomination of $1000. It generally represents the amount of money borrowed by the bond issuer.Coupon – Coupon payments represent the periodic interest payments from the bond issuer to the bondholder. The annual coupon payment is calculated by multiplying the coupon rateCoupon RateThe coupon rate is the ROI (rate of interest) paid on the bond’s face value by the bond’s issuers. It determines the repayment amount made by GIS (guaranteed income security). Coupon Rate = Annualized Interest Payment / Par Value of Bond * 100%read more by the bond’s face value. As we note above, Nike’s bond pays interest semiannually; generally, one-half of the annual coupon is paid to the bondholders every six months.Coupon rate – The coupon rate, which is generally fixed, determines the periodic coupon or interest payments. It is expressed as a percentage of the bond’s face value. It also represents the interest cost of the bond to the issuer. The coupon rate is 2.375% in the case of a $1 billion offer.Maturity – Maturity represents the date on which the bond matures, i.e., the date on which the face value is repaid. The last coupon payment is also paid on the maturity date. The maturity date is 11/1/2026

Bonds Payable Video

This article has been a guide to Bonds payable and their definition. Here we discuss how Bonds payable work and practical examples, including Nike. You may also have read through the following recommended articles –

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