Search Financial-Accounting.us

Issuance of Bonds at Par in Financial Accounting

If the coupon rate of a bond coincides with the market rate of interest when the bonds are actually sold to investors, then the bonds will sell at par value or face value. The price at which a bond is trading is usually quoted as a percentage of the bond’s par value, so that a bond that sells at par has a price of 100. To illustrate the sale of bonds at par, assume Marley Company issues bonds on January 1, 2000, with a principal amount of $100 million, to be repaid in 10 years and a 12% coupon rate of interest payable semiannually. The bond contract obligates Marley to make the following payments:

Principal: $100,000,000 due in 10 years (after 20 six-month periods),

Interest: $6,000,000 due at the end of each six-month period, for 10 years ($100,000,000 * 12% * 6/12 = $6,000,000).

Because the market rate and the coupon rate of interest are the same, the bonds sell at their face value of $100 million. The quoted annual interest rate of 12% is actually 6% each six-month period because the bonds pay interest each six months. When interest is paid each six months, the interest rate is said to be compounded semiannually. To use the present value tables, bonds with a 12% semiannual interest coupon are regarded as outstanding for a number of six-month periods (20 in this case), and the interest rate is 6% per period. In general, when interest is compounded n times each year, the periodic interest rate is i/n, and the number of periods is n years. In the present case, the periodic interest rate is 6% (i / n or 12% / 2 = 6%), and the number of periods is 20 (n * years or 2 * 10 = 20).

The following events would be reported in the financial statements over the life of the bond. On January 1, 2000, Marley Company receives $100 million in cash, and bonds payable are recorded in this amount:

Each six months for 10 years, Marley Company recognizes interest expense and pays $6 million to the bondholders each June 30 and December 31 from 2000 through 2009:

On the maturity date, December 31, 2009, Marley Company pays $100 million in bond principal and retires the bonds:

To recap, Marley Company received $100 million from investors when the bonds were issued and paid a total of $220 million to bondholders over the life of the bond issue. The total interest expense was, therefore, $120 million ($220 million in payments minus $100 million in receipts), and the interest expense each year was $12 million (2 * $6 million).

More on Bonds Payable

Noncurrent Liabilities Topics

Long-Term Notes Payable

Bonds Payable (Long-Term Bonds Payable)

Financial Reporting for Income Taxes