When governments, institutions and corporations want to raise money to finance their public service projects or business activities, many of them issue bonds. These debt securities are popular because they enable organizations to obtain funding and pay it back over time without having to give up equity.
However, they must account for the monies they pay their lenders within their financial records. And that is where the interest expense calculator for bonds comes in handy.
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What Is Bond Interest Expense?
Bond interest expense refers to the total interest expense that a bond-issuing organization incurs during the reporting period for its bonds payable. And the bonds payable is a record on the balance sheet that shows that a company has issued a bond and borrowed money. Therefore, the bonds issue creates a liability.
The bond interest expense includes the amortization of discounts or premiums on the bonds a company issues for the entire reporting period, depending on the sale price. Also, it includes the bond issue costs amortization for a similar period.
How to Find Bond Interest Expense
If you want to use the interest expense calculator to find out how much a company will end up paying for a bond it issues, you can search for the bond interest expense under the non-operating expense section of a company’s income statement and use the available information.
You are likely to find this line item before the figures for Earnings Before Interest and Taxes (EBIT). When you subtract the interest expenses, you will arrive at the pre-tax income.
How to Figure Out the Total Bond Interest Expense
Using an interest expense calculator for bonds is the easiest way to calculate what a corporate entity owes. But you can figure it out on your own if you have the relevant information.
Factors to Consider
When calculating the total bond interest expense, you need to consider the coupon rate and whether the bond was sold at face value (par value), discount or premium. In addition, you should think about the maturity period of the bond.
The face value of the bond is the price that the bond issuer will pay at its maturity. A discount bond is one whose price is below its face value, while a premium bond tends to sell for prices higher than the par value.
On the other hand, the coupon rate is the rate that the bond issuer uses to pay interest to bond investors. And it may differ from the market rate of the bond that is subject to fluctuations.
Usually, the bond maturity period refers to the length of time that the bond issuer will pay interest to investors before ceasing and returning the principal to them. It could be as long as 30 years.
Read More: Can I Sell a Bond Before It Matures?
Calculating the Total Bond Interest Expense
Below is an example of how to calculate the bond interest expense for a bond issuer known as Flowers Inc.
Suppose Flowers Inc. issued a bond worth $1,000,000 at par, with an annual coupon rate of eight percent paid semi-annually and a maturity period of five years.
In this case, each interest period is six months. And the company will pay $1,000,0008/1006/12, which equals $40,000, as semi-annual interest.
But a year has two interest periods since the bond interest is paid semi-annually. So Flowers Inc. will pay $40,000*2, which equals $80,000 a year, to investors who bought its bond.
Since the bond’s maturity period is five years, Flowers Inc. will pay out interest 25 or 10 times. Therefore, the company will pay total interest of $80,0005 or $40,000*10 to its investors over that period. That equals $400,000. Therefore, the total bond interest expense for Flowers Inc. over five years will be $400,000.
Remember, though, that at the end of the 10 interest payment periods, the company also has to return the $1,000,000 to its investors.
It is worth noting that when a bond has been issued on discount or at a premium, the bond interest expense section will differ. And it may be better to use an interest expense calculator for bonds to determine how much a company will incur over the reporting period, since it has to account for amortization.
- Investor.Gov: Bonds
- AccountingTools: Bond interest expense definition
- Corporate Finance Institute: Bond Payables
- Corporate Finance Institute: Interest Expense
- Lumen Learning: Recording Entries for Bonds
- Accounting Coach: Bonds Payable
- DQYDJ: Bond Pricing Calculator Based on Current Market Price and Yield
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