A bond is an IOU between the issuer and the investors. An option free (straight line) bond is a simple form of bond. Straight bonds pay fixed periodic coupon (annual or semi-annual) over the life and return the principal on maturity date. For example, a bond issued by the Treasury for a par value of, say $1000, with a maturity period of five with an annual interest rate of six per cent on maturity value. In such a case, the issuer, in this case – the Treasury pays an annual interest of $60 for five years, till the bond attains a par value of $1,000 and the Treasury redeems the bond to the buyer at a value of $1000 after five years from date of issue.
Bonds can be classified as: premium bonds, par bonds, and discount bonds.
- For a premium bond, price exceeds its face value. The market interest rate is less than the coupon rate. At maturity the price of a bond must equal its par value. For a premium bond, price must fall over its life.
- For a par bond, price equals its face value. The market interest rate is equal to the coupon rate. The price of a par bond may remain the same over time.
- For a discount bond, price is below its face value. The market interest rate is greater than the coupon rate. Price must rise to reach par value at maturity.
Remember that the price and yield of a bond are inversely related to each other. When yield increases, the price decreases and vice versa.
- Recognition and Measurement of Bonds
- Bond Amortization, Interest Expense, and Interest Payments
- Derecognition of Debt
- Role of Debt Covenants
- Presentation and Disclosures Related to Debt
- Leasing Vs. Purchasing Assets
- Capital Leases and Operating Leases
- Lessee Accounting
- Effects of Leases on Selected Financial Reporting Items for Lessees
- Lessor Accounting for Leases
- Lessors and Sales-Type Capital Leases
- Lessors and Direct Financing Capital Leases
- Effect of Leases on Financial Statements for Lessors
- Disclosures for Capital and Operating Lease
- Defined Benefits Plans vs. Defined Contribution Plans
- Pension Expense (both GAAP & IFRS) for the Income Statement
- Defined Benefit Plans & the Company Balance Sheet