Explain the concept of bonds payable. What is their importance?
A bond payable is a debt paper, according to which an issuer must return to the investor the value containing the face amount, par amount, or maturity amount of the bond and the percentage for using the funds (interest) within the agreed period. This account typically appears within the long-term liabilities section of the balance sheet, since bonds usually mature in more than one year.
Bonds are traded on the stock and over-the-counter stock markets. If a bondholder needs to return the invested funds urgently, they can sell them to another investor and receive money.
One of the types of bonds is coupon bonds, which is an interest payment that occurs at a particular frequency: for example, once every six months. Payment dates are known in advance, but the size of coupons can change over time. The formula for calculating the semiannual interest payments is:
Face Amount of the Bond x Stated Annual Interest Rate x 6/12 of a Year
Since bond prices are formed through supply and demand, the market price most often differs from the face value. For instance, it is measured as a percentage of the nominal. If the market price of the bond is 101.53 and the face value is 1000 dollars, this means that the paper can currently be bought or sold for 101.53% * 1000 dollars, which equated to 1015.3 dollars.
However, if a bond is trading above face value, then that means that it is trading at a premium. If lower, then it means that the bond is being sold at a discount. It is important that a journal entry must be made for each of the transactions, while the investor makes the same entries for himself. Keeping a record for all the operations can be very convenient, especially for calculating bond’s profitability.
Everyone is familiar with a simple economic law: The higher the risk, the higher the profitability, and vice versa. This rule applies to the bond market. The more reliable the bond issuer, the lower the yield it offers to its investors. Conversely, if the risk of problems with the issuer’s solvency is high, then he has to pay a higher coupon on his debt securities to interest market participants. The reliability of the issuer is also called credit quality – the higher it is, the lower the likelihood of bankruptcy.
Credit ratings are assigned to issuers and individual bond issues to assess credit quality. This is done by exclusive rating agencies that evaluate issuers’ financial indicators, their debt burden, legal risks, the state of the industry as a whole, and many other factors. The most authoritative in the world are considered the ratings of the three largest international agencies: Standard & Poor’s, Moody’s and Fitch.
Investing in bonds is the most reliable investment in the securities market. This tool is recommended for those who care about the complete safety of their funds with an income slightly higher than that of a bank deposit.
"Explain the concept of bonds payable. What is their importance?" Custom-Writing, 1 Apr. 2020, custom-writing.org/qna/concept-of-bonds-payable/.
1. Custom-Writing.org. "Explain the concept of bonds payable. What is their importance?" April 1, 2020. https://custom-writing.org/qna/concept-of-bonds-payable/.
Custom-Writing.org. "Explain the concept of bonds payable. What is their importance?" April 1, 2020. https://custom-writing.org/qna/concept-of-bonds-payable/.
Custom-Writing.org. 2020. "Explain the concept of bonds payable. What is their importance?" April 1, 2020. https://custom-writing.org/qna/concept-of-bonds-payable/.
Custom-Writing.org. (2020, April 1). Explain the concept of bonds payable. What is their importance? Retrieved from https://custom-writing.org/qna/concept-of-bonds-payable/
Custom-Writing.org. (2020) 'Explain the concept of bonds payable. What is their importance'. 1 April.