Accrual Bond - Explained
What is an Accrual Bond?
If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.
- Marketing, Advertising, Sales & PR
- Accounting, Taxation, and Reporting
- Professionalism & Career Development
Law, Transactions, & Risk Management
Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
- Business Management & Operations
- Economics, Finance, & Analytics
Table of ContentsWhat is an Accrual Bond?How is an Accrual Bond Used?Academic Research on Accrual Bonds
What is an Accrual Bond?
A bond is a debt instrument issued by a debtor to a creditor evidencing the debt. It contains loan details, including the principal loan and the periodic interest payments to be made by the issuer to the bond holder.
An accrual bond is a type of bond in which the interest is not paid periodically but accrued. The accrued interest is added to the principal amount of the bond and then paid at maturity.
Back to:BUSINESS & PERSONAL FINANCE
How is an Accrual Bond Used?
Corporations use accrual bonds in raising long-term funds. The bank deposit rates in a certain period, affect the prices of bonds that an enterprise issue in the same period. Usually, the bonds are issued at face value, at a premium or a discount. The enterprises set up for the accrual bond in their books under accounts such as the bond face value,' the bond discount,' the bond premium' and the accrued interest.' The statements are typically prepared under the subject of accounting for bond issuance, the interest accrued and interest payments. An enterprise issuing the bonds at face value is required to debit the bank deposits' together with other subjects in the correct amount received and credit the accrual bonds-par value.' However, if there is a difference, the enterprise is required to debit the accrual bonds-interest adjustment' subject. When interest is accrued using the coupon rate in each period for the bonds issued at face value, the costs and expenses relevant are included following the long-term borrowing principle. The construction in progress,' finance expenses' and manufacturing expenses' are also debited. Unpaid interest resulting from the coupon rate, for the bonds paid in installments and awaiting repayment at the end of the period, is calculated under the payable interest' subject. For a repayable bond, unpaid interest arising due to the coupon rate gets accounted under the accrual bonds-Accrued Interest' account. The calculation that is used to determine the interest costs is included in the relevant costs and expenses following the principles governing long-term loans. When accrual bond expires, and the company settles the principal plus interest of the bond, it debits the following accounts; accrual bonds face value,' accrual bonds accrued interest,' and payable interest.' The company also credits the bank deposits' account and any other used under the accrual bond. Sometimes when a bond is issued, the expenses incurred are higher than interest income realized by freezing funds during the period of issuance. When this happens, the difference arising between the costs incurred and the interest income realized is used for fixed assets. This is according to the objective of raising money for the issuance of bonds. It is treated under the principle of capitalization of borrowing costs if it is for the project. If it is for other purposes, the difference is included in the current financial expenses. This mainly arises if the cost incurred in freezing the interest income realized when releasing the funds, is higher than the issue. The provisions on the capitalization of long-term borrowing costs provide the guidelines to the principle of handling other borrowing costs. The company issues a convertible corporate bond that has a redemption option. The bond also has the interest compensation supposed to be paid on the redemption date. The interest compensation is the difference arising from the interest paid on the bond and the interest to be paid when the bond redemption period expires. The principal of capitalization of borrowing costs still provides the guidelines on how to treat the accrued interest to be paid from the issue date to the redemption date.