What is Bonds issued between interest dates?
In short
When bonds are sold between interest payment dates, the buyer pays the price of the bonds plus the interest accrued since the last interest date. The issuer then pays a full period's interest on the next payment date.
Key takeaways
- The issuer records the accrued interest received as interest payable or as a reduction of interest expense.
- Interest expense for the first period covers only the time the bonds were outstanding.
- Cash received equals price plus accrued interest.
Example
$1,000,000 of 6% bonds paying interest every January 1 and July 1, issued at par on March 1: the buyer pays $1,000,000 + $10,000 of accrued interest.
Where it's tested
FAR: Long-Term Debt (Bonds & Notes) — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
Bonds with a face amount of $500,000 and an 8% annual coupon are issued for $470,000 when the market rate is 9%. Using the effective interest method, what is interest expense for the first year?