BUS601: Financial Management

A bond is a long-term debt, or liability, owed by its issuer. Physical evidence of the debt lies in a negotiable bond certificate. In contrast to long-term notes, which usually mature in 10 years or less, bond maturities often run for 20 years or more.

Generally, a bond issue consists of a large number of USD 1,000 bonds rather than one large bond. For example, a company seeking to borrow USD 100,000 would issue one hundred USD 1,000 bonds rather than one USD 100,000 bond. This practice enables investors with less cash to invest to purchase some of the bonds

Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder. The borrower promises to pay (1) the face value or principal amount of the bond on a specific maturity date in the future and (2) periodic interest at a specified rate on face value at stated dates, usually semiannually, until the maturity date.

Large companies often have numerous long-term notes and bond issues outstanding at any one time. The various issues generally have different stated interest rates and mature at different points in the future. Companies present this information in the footnotes to their financial statements. Exhibit 117 shows a portion of the long-term borrowings footnote from Dow Chemical Company's 2000 annual report. Promissory notes, debenture bonds, and foreign bonds are shown, with their amounts, maturity dates, and interest rates.

Exhibit 117: Dow chemical company's long-term notes and bonds (in millions)