A bond is a financial instrument that corporations, hospitals and government agencies may use to capitalize the company. Issuing bonds provides a corporation with an alternative to issuing stock, when it comes to raising funds for the business. When an investor pays cash to an entity for a bond, it increases the company's cash flow while creating an obligation to pay interest plus the face value of the bond. Depending on the terms of the bond, interest must be repaid on a semi-annual basis.
1. Review the financial terms of the bond. Determine the bond principal, interest rate and maturity date. For example, a corporation may issue a $200,000 bond with 10 percent interest payments due semi-annually. This means the corporation agrees to make two interest payments per period. Furthermore, let's assume the bond matures in 10 years.
2. Multiply the number of bond years by the number of periods. In this scenario, multiply ten by two, which results in 20. This number represents the total number of interest payments associated with the bond.
3. Multiply the bond principle by the interest rate. For instance, a bond issued at $200,000 with a 10 percent interest rate has an annual interest expense of $20,000. Notice this calculation yields the annual interest expense on the bond, as opposed to the semi-annual interest expense.
4. Divide annual interest expense by two. This produces the semi-annual interest expense associated with the bond. Using the annual interest expense in Step 3, a company will have semi-annual interest expense of $10,000. This means the company must pay the bondholder $10,000 interest every six months.