What conditions cause a discount on bonds payable?
Discount on bonds payable occurs when a bond’s stated interest rate is less than the bond market’s interest rate.
If a $1,000,000 bond issue promises to pay interest of 8% per year and the bond market demands 8.125%, the bonds will sell for less than $1,000,000. The difference between the $1,000,000 of face value and the amount the bond market is willing to pay is the discount on bonds payable.
The amount of the discount is a function of 1) the number of years before the bonds mature, and 2) the difference in the bond’s stated interest rate and the market’s interest rate.
Learn more about Bonds Payable.
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