Bond Interest Expense
Bond interest expense is the periodic cost incurred by a bond issuer for borrowing funds through the issuance of bonds. It represents the interest payments made by the issuer to bondholders over the life of the bond. The interest expense is calculated based on the bond’s coupon rate (the annual interest rate) and the bond’s face value (also known as par value).
When a company issues bonds, it receives funds from investors in exchange for periodic interest payments and the repayment of the bond’s face value at maturity. The bond interest expense is recorded on the company’s income statement as a financing cost, reducing the company’s net income.
To calculate the bond interest expense, simply multiply the bond’s face value by the annual coupon rate and divide by the number of interest payments per year (usually semiannually or annually).
For example, if a company issues a 5-year bond with a face value of $1,000 and an annual coupon rate of 6%, the bond interest expense per year would be:
Bond interest expense = ($1,000 face value) × (6% coupon rate) = $60 per year
If the interest payments are made semiannually, the bond interest expense per payment would be:
Bond interest expense per payment = $60 per year ÷ 2 = $30 per payment
The bond interest expense will remain constant over the life of the bond, assuming the bond has a fixed coupon rate. It’s important to note that the bond interest expense is different from the bond’s yield, which takes into account the bond’s current market price and may change over time due to market conditions or changes in interest rates.
Example of Bond Interest Expense
Let’s consider a hypothetical example of a company called “Healthy Foods Inc.” that issues bonds to raise funds for a new production facility.
Healthy Foods Inc. issues a 7-year bond with a face value of $1,000,000 and an annual coupon rate of 5%. The interest payments are made semiannually.
To calculate the bond interest expense, we first determine the annual interest expense by multiplying the bond’s face value by the annual coupon rate:
Annual bond interest expense = ($1,000,000 face value) × (5% coupon rate) = $50,000 per year
Since the interest payments are made semiannually, we divide the annual interest expense by 2 to determine the bond interest expense per payment:
Bond interest expense per payment = $50,000 per year ÷ 2 = $25,000 per payment
Healthy Foods Inc. will record a bond interest expense of $25,000 on its income statement for each semiannual interest payment over the 7-year life of the bond. This bond interest expense represents the cost of borrowing funds through the issuance of bonds, which will be used to finance the company’s new production facility.