Theory
Bonds Payable
Corporations must raise funds to finance their operations and ordinarily some of these funds must be provided by external sources. Many large corporations often choose to borrow money by issuing bonds. A bond issue breaks down a large quantity of debt into manageable parts, usually $1,000 units. By dividing their debt into smaller pieces, corporations avoid having to find a single investor that is both willing and able to lend a large amount of money at a reasonable rate of interest.
A corporation that issues bonds is obligated to repay a stated amount, usually referred to as the face amount, at a specified maturity date. In addition, the corporation agrees to pay interest to bondholders between the issue date and maturity. The periodic interest is a stated percentage of the face amount and the payments are generally made semiannually on designated dates beginning six months after the bonds are issued.
All of the specific promises made to bondholders are described in a bond indenture. This formal agreement will specify the bond issue's face amount, the stated interest rate, the method of paying interest, and whether the bonds are backed by any specified assets. The bond indenture also may provide for their redemption through a call feature, by serial payments, through sinking fund provisions, or by conversion. The bond indenture serves as a contract between the corporation and the bondholders. If the corporation fails to comply with the terms of the indenture, a trustee may bring legal action against the corporation on behalf of the bondholders.
At issuance, bonds are recorded as a liability to the corporation borrowing money and an asset to the investor. Each side of this transaction is said to be a mirror imag ...