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Part of an accountant’s job may be to advise management when there is excess profit. One way to invest extra cash is in bonds. A bond is a loan given to another company that bears interest.
Bonds are a short-term investment strategy because they can easily be converted to cash when needed. Bonds can be sold at discount or premium. Here are three possible variations-
- Bonds sold at par: Bonds are sold at the face value stated on the bond certificate. The stated interest rate is the same as the market interest rate.
- Bonds sold at a discount: These bonds have a lower stated interest rate than the market interest rate. The bond will be sold at less than face value to compensate for offering a non-competitive interest rate.
- Bonds sold at a premium: These bonds have a higher stated interest rate than the market interest rate. This occurs because the seller of the bond will not sell when the stated amount of interest to be paid is greater than what is being paid in the market.
Types of Bonds
This is a list of bonds typically sold on the market.
- Coupon Bonds: They come with detachable coupons that are cashed in at specific dates. They are not very common today.
- Registered Bonds: These are registered in the name of the owner and require the presentation of the bond certificate at the time of maturity.
- Serial Bonds: They are issued to mature at dates spread out over time.
- Convertible Bonds: These bonds can be exchanged by the holder for a specified number of shares of corporate stock.
- Callable Bonds: These bonds allow the company to buy back the bonds at a specified price before the bonds’ maturity date. The company will often exercise this option when the market interest drops significantly below the stated rate.