Difference Between Bonds and Notes Essay

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Bonds & Long-Term Notes

There are a good number of ways to create funding when it comes to organizations and businesses of any size. Two of the more common ones, and indeed the ones that will be covered in this brief research report, are long-term notes and bonds. These two forms of capital creation are similar in terms of what they provide for the organization that issues the bonds or notes. However, they are quite different in how they operate and can be sold or otherwise handled after they are issued. The commonalities and differences between these funding devices will be described along with what each of them is in terms of definition and function. While bonds and notes both serve the same basic purpose, they are different in some very important respects.

Analysis

From an accounting standpoint, both bonds and long-term notes are quite similar. One way in which they are basically the same is that they are written promises to pay interest as well as the principal amount borrowed on some future specified date. Another common thread between the two is that both are reported as a liability from an accounting standpoint. Finally, the interest from both instruments are accrued as a current liability. When looking further at the accounting practices and implications of bonds or notes, it is important to know and remember that if a bond or note is going to reach its maturity within a year of the balance sheet date and the payment for such maturity is going to create a reduction in working capital, then this would make it a current liability. If that is not the case because the maturity, and thus the reduction in working capital, happens more than a year from the date of the balance sheet, than that means it is a long-term liability. When it comes to notes in particular, the latter of those two would obviously be the focus of this report alongside the bonds that are also mentioned (Accounting Coach, 2017).

In less of an accounting context, there are a few other things that should be considered.

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Both of the instruments have a defined maturity date and both have an implied interest rate that is expected to be honored as printed. Both of the instruments are valued based on their present value and the formula that goes into the same. That would include, of course, future interest and the principle cash flows involved. The interest that is yielded from the instrument does tend to vary. Often times, the interest rate is directly linked to the market and its associated rates. Other times, it can be a rate that is otherwise specified and stated per the details and rules surrounding the issued note or bond. The interest rate stated, whatever it may be, is presumed to be the normal market rate for the instrument in question. There are three narrow circumstances where this might be the case. These would include if there is no stated interest rate, the stated interest rate is clearly not within the normal range of reason or if the face amount is “materially” different than the cash sales price of that same instrument. In the event that one or more of those happens to apply, the fair market value of the instrument would be considered to be the value of that note (UTEP, 2017).

There are some situations, it should be noted, that the notes or bonds are not paid all at once. Indeed, there are some situations where there is the use of installments. This is a common practice when the bond or note is being used to finance property or equipment. In such agreements, there can concurrently be the payment of points, not unlike what happens in many mortgages. Each point is a percentage point of what is being borrowed and, like mortgages, serves as a basis to define what the borrowing fees shall be above and beyond the common interest that will be due from the same transaction. When points are involved, they are typically amortized over the life of the loan, which is a bit different than what is seen with mortgages. One very important thing to know about….....

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