Bonds payable are liabilities which represent debt raised by a company from external investors which it vows to pay back in a specific time together with periodic interest payments over the life of the bond.
The time span in which a company has to pay back the principal plus interest is called the maturity of the bond. The periodic interest payments are called coupon payments and the interest rate specified in the contract is called coupon rate.
Bonds payable are governed by a contract called the bond indenture which specifies the terms of the bond such as maturity, repayment schedule, etc. and specifies any covenants. Positive covenants are certain obligations which the company has to fulfill during the term of bond, for example a bond indenture may require a company to maintain a times interest earned ratio of at least 3. Negative covenants are restrictions on the company; for example, a bond indenture may require a company not to have a dividend payout ratio in excess of 40%.
Company B issued 100,000, $100 face value bonds carrying a coupon rate of 8% payable semiannually. The bonds were issued on 1 January 2000 and are expected to mature in 20 years. Calculate the periodic interest payments.
The periodic interest payments equal the face value multiplied by the coupon rate applicable. In this scenario annual coupon rate is 8% but the bond will pay two payments each year so each periodic payment is 8%/2*$100*100,000 = $400,000