Bonds Payable

The zero coupon bond price is the present value of all future cash flows expected from the bond. For a zero coupon bond, there are no periodic interest payments, and the only cash flow is the face value of the bond received by the investor at the maturity date. In order to receive a return on their investment a zero coupon bond must be issued to investors at a deep discount.

The bond price is the net present value of all future cash flows expected from the bond. The bond cash flow includes the receipt of the principal amount at the maturity date, and the receipt of periodic interest payments throughout the term. Time value of money calculations can be used to determine the bond present value.

The straight line bond amortization method is used to calculate the amount of premium or discount on bonds payable to be amortized to the interest expense account each accounting period.

The effective interest rate method together with a bond amortization schedule is used to calculate the amount of premium or discount on bonds payable to be amortized to the interest expense account each accounting period.

Bonds payable are long term liabilities and represent amounts owed by a business to a third party. A business will issue bonds payable if it wants to obtain funding from long term investors by way of loans.

The bond payable will stipulate the interest rate and the term to be used, known as the maturity date. At the maturity date the investor will receive repayment of the principal amount invested and interest. Bonds are transferable, and an investor can sell their bond before the maturity date.