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Subject: Financial Accounting
ond Interest and Principal Payments
A bond is a type of long-term debt that is issued by a corporation and is purchased by an investor for cash. A formal contract is issued by the corporation that states the legal terms of the bond. The advantages of issuing a bond from a corporation is that the ownership interest of the bondholders will not be diluted and those bonds are available at lower costs than the common stocks available. After a bond is issued by the corporation, the bondholder is promised of: a.
Payment of interest every six months at the stated interest rate of the bond b.
The face amount or the principal amount after the bond matures on its due date
Bond Interest Payments
In a bond, the interests are usually paid semi-annually. This payment structure refers to payment of the interest by the corporation on-half portion of the annual interest after every six month period, till the bond is scheduled to be outstanding. The semi-annual interests are calculated using the following formula: Semi Annual Interest = Face amount of the bond X Stated Annual Interest Rate X (6/12 of a year)
Bond interest payments or the bond’s stated interest are also referred to by using
terms such as coupon interest rates, face interest rates, nominal interest rates, or contractual interest rates. The stated interest rate is usually found to be fixed for life till the bond matures.