Lecture Notes: Chapter 10 – Reporting and
Interpreting Bond Securities
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
Introduction
Bonds are a popular method of long-term financing used by corporations. They are formal debt
instruments that require the issuer to pay interest and repay the principal at maturity. This chapter
explores how bonds are structured, issued, and reported in financial statements. We’ll also cover
the implications of issuing bonds at par, a discount, or a premium; important solvency ratios;
early retirement of bonds; and how bond-related activities appear in the statement of cash flows.
1. Characteristics of Bond Securities
Bonds are essentially contracts between a borrower (issuer) and investors (bondholders). Key
terms include:
Face Value (Par Value): The amount the issuer agrees to pay at maturity (typically
$1,000 per bond).
Coupon Rate: The annual interest rate applied to the face value to determine periodic
interest payments.
Maturity Date: The date on which the issuer repays the bond’s face value.
Market Interest Rate: The rate investors demand at the time of issuance; it determines
whether bonds sell at par, discount, or premium.
Bond Types:
Secured Bonds: Backed by specific assets as collateral.
Unsecured Bonds (Debentures): Not backed by assets.
Callable Bonds: Can be repaid early by the issuer.
Convertible Bonds: Can be exchanged for the issuing company’s stock.
2. Bonds Issued at Par
, When the coupon rate = market rate, bonds are issued at par (i.e., at face value).
Example:
Face value: $100,000
Coupon rate: 6%
Market rate: 6%
Term: 5 years
Interest: $6,000 per year
Journal Entry at Issuance:
Dr. Cash 100,000
Cr. Bonds Payable 100,000
Annual Interest Payment:
Dr. Interest Expense 6,000
Cr. Cash 6,000
No amortization is required because the bond is issued at face value.
3. Times Interest Earned (TIE) Ratio
This ratio measures a company’s ability to meet interest obligations:
Example:
EBIT = $240,000
Interest Expense = $30,000
A TIE ratio of 8 means the company earns 8 times its annual interest obligation—indicating
strong coverage.
Interpreting Bond Securities
Based on Financial Accounting, 11th Edition by Libby, Libby, and Hodge
Introduction
Bonds are a popular method of long-term financing used by corporations. They are formal debt
instruments that require the issuer to pay interest and repay the principal at maturity. This chapter
explores how bonds are structured, issued, and reported in financial statements. We’ll also cover
the implications of issuing bonds at par, a discount, or a premium; important solvency ratios;
early retirement of bonds; and how bond-related activities appear in the statement of cash flows.
1. Characteristics of Bond Securities
Bonds are essentially contracts between a borrower (issuer) and investors (bondholders). Key
terms include:
Face Value (Par Value): The amount the issuer agrees to pay at maturity (typically
$1,000 per bond).
Coupon Rate: The annual interest rate applied to the face value to determine periodic
interest payments.
Maturity Date: The date on which the issuer repays the bond’s face value.
Market Interest Rate: The rate investors demand at the time of issuance; it determines
whether bonds sell at par, discount, or premium.
Bond Types:
Secured Bonds: Backed by specific assets as collateral.
Unsecured Bonds (Debentures): Not backed by assets.
Callable Bonds: Can be repaid early by the issuer.
Convertible Bonds: Can be exchanged for the issuing company’s stock.
2. Bonds Issued at Par
, When the coupon rate = market rate, bonds are issued at par (i.e., at face value).
Example:
Face value: $100,000
Coupon rate: 6%
Market rate: 6%
Term: 5 years
Interest: $6,000 per year
Journal Entry at Issuance:
Dr. Cash 100,000
Cr. Bonds Payable 100,000
Annual Interest Payment:
Dr. Interest Expense 6,000
Cr. Cash 6,000
No amortization is required because the bond is issued at face value.
3. Times Interest Earned (TIE) Ratio
This ratio measures a company’s ability to meet interest obligations:
Example:
EBIT = $240,000
Interest Expense = $30,000
A TIE ratio of 8 means the company earns 8 times its annual interest obligation—indicating
strong coverage.
