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Bond Interest and Principal Payments

# Bond Interest and Principal Payments

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Looking for personalized help with your financial accounting assignments? Visit http://classof1.com/homework-help/financial-accounting-homework-help/

Bond Interests and Principal Payments:
Looking for personalized help with your financial accounting assignments? Visit http://classof1.com/homework-help/financial-accounting-homework-help/

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05/07/2014

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Financial ccounting

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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.

*
The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades.
Subject: Financial Accounting

Bond Principal Payments
In a bond, the principal amount is the one that is shown primarily on the bond. This amount is the one that the corporation must pay back to the bondholders on the
bond’s maturation
day . A few of the terms that are used to refer to the principal amount payment of the bond include stated value, par or par value, maturity value or maturity amount, and face value.
Timeline for Interest and Principal Payments
In order to calculate and keep a check on the cash payments that are made by a corporation to the bond-holders as promised by them, it is necessary to prepare a timeline for the same. This timeline will represent both the principal amount and the interest amount of the bond scheduled to be matured over a period of five years. This timeline is indicative of how the corporation is supposed to pay the bondholders semi-annual interests in 10 times. That is, each of the payment of interest happens at the end of every 10 six months. When the bond matures at the scheduled 10th sixth month, the corporation has to pay its bondholders the principal amount. It should be noted that the cash amounts do not change during the entire life span of the bond.