 In this discussion, we will discuss the discussion question of, what is a bond? Support Accounting Instruction by clicking the link below, giving you a free month membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources, such as Excel practice problems, PDF files and more, like QuickBooks backup files, when applicable. So once again, click the link below for a free month membership to our website and all the content on it. So when considering the topic of bonds, this is probably one of the broadest types of questions they could be given in an essay format or discussion question type format. A couple of different ways to approach a question like this. One would just be to first define the bond and then probably get some characteristics of the bond and then possibly talk about how a bond might be recorded, journal entries related to the bond. A bond is going to be a written promise to pay an amount identified on the bond. So we're going to have the par value or the face amount of the bond plus any stated interest. So a bond is going to be an agreement to pay the par back plus any interest. It's going to be very similar to a note in that way in that the idea would be that we would be trying to finance the company if we're going to be the issuer of the bond. We're going to issue bond in order to finance the company. We're going to receive payment in order and we're going to give a promise to return the payment typically to return the principal and plus any interest that's going to be stated on the bond. Bonds are usually going to be for amounts of $1,000 bonds, possibly $5,000 bonds are going to be the amount types of each individual bonds and then we can group them together and sell multiple bonds at particular times. So in essence that's going to be what the bond is. Now we can get into different types of bonds and we can also get into the issuing of the bond. How would it be recorded? What would it mean to be recorded at a discount or a premium? Different types of bonds could include bonds that are either secured bonds or unsecured bonds. A secured bond would just mean that there's some type of asset, some type of collateral on the bond so therefore if there was no payment on the bond then the collateral asset would then be compelled, you can compel them to sell the asset and therefore use the proceeds to pay off the bond. So they're more secured, secured bond are going to be safer type of bonds in that way whereas unsecured are not going to be supported by collateral and therefore have to be a bit more risky. We can also have serial bonds which are going to be bonds which are unlike kind of a normal bond which has one maturity date. A serial bond would have multiple dates that it would typically be maturing in a series of dates in the future. We can have convertible bonds, bonds that can be exchanged for shares of stock. We can convert the bonds if that's going to be some type of bond. We can also have bonds that are callable and that would be a bond that we can call back at a stated price before the maturity date. So those are just some other things that if we had a general question like this we can list out the different types of bonds that are there. It might also be useful for trying to pick up as many points as possible in something like this or just add discussion to a question like this to compare and contrast bonds to other types of financing options. And when a company issues a bond what it's trying to do is try to get money for whatever it needs for the business. Now obviously revenue would be the way we would like to do that, to earn revenue. But if we need to finance the business in some other way we have a few options. We can issue bonds or we can take out a loan from the bank or we can issue stock. So we might want to compare and contrast bond financing to other types of financing just to try to pick up as many points and see what this type of question is looking for. And the bond financing is similar to taking out a loan. We're still going to have a note basically that we owe in the future. One of the main differences is that the bond we can give to the public. So we have the ability to sell bonds. We might be able to sell bonds on an exchange even. Whereas the loan typically we're restricted more to the bank. So it might be more possible therefore to raise more capital with bonds if we could sell the bonds to the public. So that's going to be one of the advantages of the bonds. One of the problems with bonds which is similar to a note is that we do have to pay back the interest and the principle on the bond. So we not only have to pay back the bond money that we get, we have to pay back interest or we have to pay back whatever we say is on the bond at the end. The par value, the face amount plus the interest on it. Whereas we would have to do the similar thing with a note. We'd still have to pay back the note and the interest. But if we were to finance with stock, say, then we wouldn't have that. We can issue the stock and we get the money and we wouldn't have to pay back anything. So what's the bad thing about that? Of course, the stock, we would be giving up ownership in the company, some type of ownership. So claims to the dividends, claims to the value of the company in case of liquidation, the net assets of the company and some voting and controlling rights. We're giving up with the issuance of stock. Whereas bonds, we don't do that. We keep control of the company. We don't give away any of the value of the company or any of the purchasing or decision-making power when we issue bonds. But in order to issue bonds, we have to give something and that something's going to be paying back the bonds. Plus the interest we're going to have to pay on the bonds. Now, we might also discuss what the bond is going to go on the books for, how are you going to record it, what's a premium and what's a discount, just to pick up as many points as possible. And when you issue the bond, we could issue it at par. We could issue it at a premium. We could issue it at a discount. And all that means is that if the bond, say, is going to have, we have a $1,000 bond. And let's say the interest rate on the bond is 10%. Then the question is, what are we going to sell those bonds for? Note, you can't change these two things. If it was a note, we would change the interest rate. And so if we want a $1,000 loan, if we were trying to get a loan, we would say, I need a $1,000 loan bank. And they would say, OK, well, let's haggle over the interest rate. But here, the interest rate's already on the bond if it's already been made. So we can't haggle over the interest rate. All we can haggle over is the price of the bond. So if the market rate then is different, if the market rate is, say, higher, if somebody is trying to give me, we're trying to get $1,000 from this person, and the market rate is higher, they can give their $1,000 someone else and get 12% return as opposed to hour 10, well, then we're not going to be able to sell our bond unless we sell it at a discount. So if the market rate is greater than the stated rate, we're going to have a discount. If the market rate is less than, well, let's put it down here. We're going to say it's 5%. Well, then someone can only go somewhere else and get 5%. That's supposed to be a 5, by the way. And if they can only get 5%, they're going to want our bond for sure. But we're not going to sell it and give 10% of the $1,000 unless we are able to sell it at a premium. We would want more money. So that's when we can have it sold at a discount or premium if the market rate was the same, then we would just sell it just like a kind of a note. We would just say, we'll pay the 10% interest. That's the market rate and 1,000. If we made the bond just at the same date that we sold it, we would try to shoot for the market rate. And that would be the case. If there's any difference between the date it was made and the date sold, it's less likely that the market rate is going to equal the stated rate on the bond. And then we're going to have to issue it for a discount or a premium.