CPA FAR | Financial Accounting and Reporting | Bonds
Channel: LetsLearn Global
Date: 13/02/2024

Bond :
A bond is a fixed-income security that represents a loan made by an investor to an issuer (such as a corporation or government). In return, the issuer promises to pay periodic interest (called coupon payments) and return the principal amount (called the par value or face value) at maturity.
Par Value (Face Value):
The par value (or face value) of a bond is the amount the issuer agrees to repay to the bondholder at maturity.
Example: If you hold a corporate bond with a par value of $1,000, you will receive $1,000 when the bond matures.

Discounted Issue:
A bond issued at a price below its par value is considered a discounted issue.
Example: Suppose a company issues a bond with a par value of $1,000 but sells it in the market for $980. The bond is a discounted issue, and the difference between the market price and the par value is the bond discount ($20 in this case).

Premium Issue:
A bond issued at a price above its par value is known as a premium issue.
Example: Imagine a government bond with a par value of $1,000 that trades at $1,050. This bond is a premium issue, and the excess over the par value is the bond premium ($50 in this example).

Stated Rate (Coupon Rate):
 The stated rate (also called the coupon rate) is the fixed annual interest rate specified in the bond contract.
Example: If a corporate bond has a stated rate of 5%, it pays $50 in annual interest (5% of $1,000 par value).

Market Rate (Yield):
The market rate (also known as the yield) is the prevailing interest rate in the economy. It determines the bond’s market price.
Example: If the market rate rises above the bond’s stated rate, existing bonds become less attractive. Investors may buy new bonds with higher yields, causing the value of existing bonds to decrease.

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