Depending on how far in the future the maturity date is from the present date, bonds payable are often segmented into “Bonds payable, current portion” and “Bonds payable, non-current portion”. The premium on bonds payable is known as the excess amount over the face value of the bond. An unamortized bond discount is a difference between the par of a bond and the proceeds from the sale of the bond by the issuing company. You’ll need to know how much money you’ll receive with every interest during the life of the bond. Remember, though, you’ll use the face value of the bond to calculate the interest payments, not the amount that you paid for the bond.

The discount rate for both the principal and interest payment components is the market rate when the bond was issued. Bonds issued at a premium indicate recently issued debt and that the trade is at a rate in surplus of its par rate.

Interest Payments

In this case, you’ll credit bond premium account for $4,100.Note that the complete accounting from this step and the previous step keeps your books in balance. To further explain, the interest amount on the $1,000, 8% bond is $40 every six months. Because the bonds have a 5-year life, there are 10 interest payments . The periodic interest is an annuity how to calculate premium on bonds payable with a 10-period duration, while the maturity value is a lump-sum payment at the end of the tenth period. The 8% market rate of interest equates to a semiannual rate of 4%, the 6% market rate scenario equates to a 3% semiannual rate, and the 10% rate is 5% per semiannual period. When the bond is paid off, record any final interest payment.

If a bond is issued at a given rate and then prevailing interest rates in the bond market fall, then the higher-interest bond looks better than it did previously. Bonds payable entail the form of property issued to huge institutions within a given period on credit terms to enable them to run their errands.

Bond Amortization Methods

Bond payable is a promise set to pay the bond holder with some interest along with the principal amount on its maturity on a fixed date in the future. These bonds are generally issued by the government or corporates to generate cash. When a bond is issued it creates a liability and therefore bonds payable appear on the liability side of the balance sheet of the company. Bonds payable is thus categorized under long term class of liabilities.

The coupon rate of interest is 10% and has a market rate of interest at 8%. The account Premium on Bonds Payable is a liability account that will always appear on the balance sheet with the account Bonds Payable. In other words, if the bonds are a long-term liability, both Bonds Payable and Premium on Bonds Payable will be reported on the balance sheet as long-term liabilities. The combination of these two accounts is known as the book value or carrying value of the bonds. On January 1, 2021 the book value of this bond is $104,100 ($100,000 credit balance in Bonds Payable + $4,100 credit balance in Premium on Bonds Payable). To figure out how much you can amortize each year, you take the unamortized bond premium and add it to the face value. Then multiply the result by the yield to maturity, and subtract it from the actual interest paid.

Financial Statements

As the interest rates changes in the market, the interest which a corporation is supposed to give on a bond is at times higher or lower than the interest rate it actually gives to the investors. Bond discount is a condition when an investor pays less than the face value of the bond which represents a higher interest rate than what for the bond was issued for.

For example, if you bought a bond for $104,100 that has a face value of $100,000, you would credit the bonds payable account for $100,000. This will be easy to retrieve because you’ll be given the yield at time of purchase.You can also calculate current yield by dividing the annual cash flows earned by the bond by the market price. The interest expense is amortized over the twenty periods during which interest is paid. Amortization of the discount may be done using the straight‐line or the effective interest method.

In the EIRA, you figure each amortization payment by reducing the balance in the premium on bonds payable account by the difference between two terms. The first term is the fixed interest payment, which in the example is $45,000.

The total cash paid to investors over the life of the bonds is $22,000, $10,000 of principal at maturity and $12,000 ($600 × 20 periods) in interest throughout the life of the bonds. Lighting Process, Inc. receives a premium from the purchasers.

As the discount is amortized, the discount on bonds payable account’s balance decreases and the carrying value of the bond increases. The amount of discount amortized for the last payment is equal to the balance in the discount on bonds payable account. As with the straight‐line method of amortization, at the maturity of the bonds, the discount account’s balance will be zero and the bond’s carrying value will be the same as its principal amount. See Table 2 for interest expense and carrying values over the life of the bond calculated using the effective interest method of amortization . When a corporation prepares to issue/sell a bond to investors, the corporation might anticipate that the appropriate interest rate will be 9%.

All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Bonds are also rate by credit agencies based on their risk profile. Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts.