What Are Bonds Payable?

Bonds payable are a type of long-term debt that is sometimes used as a means of generating funds for a company or municipality that can be repaid over time at a fixed or variable rate of interest. The bondholder may receive interest payments periodically throughout the term assigned to the issue, or receive a lump sum that includes the principal investment and the interest once the maturity date for the debt arrives. There are a number of different types of bonds payable, although each of these types of bonds do carry the characteristic of being a long-term debt rather than an obligation that is repaid with interest in a short period of time.

Companies or municipalities will create and issue bonds payable for a number of purpose, with the most common reason being the financing of a project that is outside the scope of the usual operating budget. Typically, these projects will take several years to be completed. In order to delay repayment of the financing raised to fund the activity, the use of a bonds payable strategy makes it possible to issue periodic interest payments on the debt, only retiring the entire obligation once the maturity date is reached. Interest payments may be issued quarterly, semi-annually, or even annually, depending on the provisions found within the agreement that governs the debt obligation.

The use of a bonds payable approach can also benefit investors. By choosing to purchase the long-term debt, investors can create a revenue stream that will provide a steady flow of interest payments over a period of at least several years. Since bonds payable issues may be structured to last for a decade or more, this means a consistent flow of interest income at least annually. Once the issue matures, investors receive the lump sum of the original payment and can invest that money and create a new revenue stream.

As with any type of investment activity, bonds payable issues should be considered with care. While bonds in general are considered safe investments compared to riskier securities, it is important to consider the type of project involved, the financial stability of the issuer today and during the life of the debt security, and the projection of the amount of interest income that will be generated from the venture. Should there be indications that there is a high probability of the issue being called early or that the issuer will fail during the life of the bonds payable, seeking a different investment opportunity would be in the best interests of the investor.