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.
1. 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.
2. 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.
3. 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.
4. 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.