Issuing a bond is one way a company can raise money to finance its operating activities. When a bond is issued, the company incurs a liability to repay the bond principal with interest. Bonds are issued in $1,000 denominations and carry a repayment term of one year or more. Bond interest expense is defined as the amount of interest expense associated with a bond during the time indicated on the company’s income statement.
View the terms of the bond. Note the face value of the bond, the interest rate and maturity date. Assume a company issued a $100,000 bond with an 8 percent interest rate, and the maturity date of the bond is in five years with semi-annual interest payments.
Calculate the amount of interest expense for every six-month period, since the company must pay interest on the bond every six months. For example, a company that issues a $100,000 bond with an 8 percent interest rate has interest expense of $8,000. This indicates the annual interest expense associated with the bond. Divide $8,000 by two, which results in $4,000. In this scenario, $4,000 is the interest expense on the bond the company must pay every six months.
Compute the total number of periods that a company has to pay interest expense. Determine the number of interest expense periods in one year. If a company must make semi-annual interest payments, then there are two interest payment periods in one year. Multiply the number of interest payment periods in a year by the number of years on the bond. For example, a company that has to pay two interest payments per year on a five-year bond has a total of 10 periods to pay interest on the bond.
Multiply the six-month interest expense by the number of periods. For example, a company that has to pay interest expense of $4,000 every period for 10 periods has total bond interest expense of $40,000. In this scenario, a company will pay a total interest expense of $40,000 over the life of the bond.