Lesson 24 of 33 · Free
Contents
- 1 Bonds Payable
- 1.1 What a bond is
- 1.2 Bond vocabulary
- 1.3 Why bonds sell at par, discount, or premium
- 1.4 Journal entries through a bond’s life
- 1.5 Premium bonds — the mirror image
- 1.6 Other bond features to know
- 1.7 Lesson recap
- 1.8 Practical Indian Application
- 1.9 Worked Example — Reliance NCD Issuance
- 1.10 Common NCD Accounting Mistakes
- 1.11 Frequently Asked Questions
- 1.12 NCD Investor Considerations
Bonds Payable
Long-term loans in tradable form. Why bonds sell at par, discount, or premium — and how the discount or premium amortises through the bond’s life.
What a bond is
A bond is a loan in tradable form. The issuer (a company or government) raises money from many investors by issuing certificates promising to pay back the face value at maturity plus periodic interest (coupon) along the way. Bonds let issuers raise large sums and let investors lend in convenient denominations.
For the issuer’s books, a bond issuance creates a long-term liability. The interesting accounting comes from premiums, discounts, and how interest expense gets recognised over the bond’s life.
Bond vocabulary
- Face value (par) — the amount the issuer promises to repay at maturity. Typically ₹1,000 in India, $1,000 in the US.
- Coupon rate — the annual interest rate printed on the bond, applied to face value.
- Maturity — the date face value is repaid.
- Market rate (yield) — the interest rate investors currently demand for similar-risk bonds. Changes daily.
- Issue price — what investors actually pay. Equals face value only if coupon = market rate.
If a bond has a 10% coupon but the market demands 10% return, investors pay face value — bond sells at par. If the market demands 11%, investors won’t pay full face for a 10% bond; they’ll discount it. If the market demands 9%, investors are happy to pay more — premium.
The exact price is the present value of all future coupon payments plus the present value of the face-value repayment at maturity, discounted at the market rate.
Journal entries through a bond’s life
Example: 3-year, ₹1,00,000 face, 10% annual coupon. Market rate at issue: 12%. Bond sells at a discount; issue price ₹95,196.
At issuance:
Dr. Cash 95,196
Dr. Discount on Bonds Payable 4,804
Cr. Bonds Payable 1,00,000
The discount is a contra-liability. It reduces the carrying amount of the bond from ₹1,00,000 to ₹95,196 on the balance sheet.
Year 1 interest expense (effective-interest method):
Interest expense = Carrying amount × Market rate = 95,196 × 12% = ₹11,424.
Cash paid = Face value × Coupon = 1,00,000 × 10% = ₹10,000.
The difference ₹1,424 amortises part of the discount.
Dr. Interest Expense 11,424
Cr. Cash 10,000
Cr. Discount on Bonds Payable 1,424
The carrying amount at end of Year 1 is now ₹95,196 + ₹1,424 = ₹96,620 — moving toward face value as the discount amortises.
At maturity (end of Year 3):
Dr. Bonds Payable 1,00,000
Cr. Cash 1,00,000
Other bond features to know
- Convertible bonds — investor can convert into shares at a fixed ratio. Reduces coupon needed.
- Callable bonds — issuer can repay early. Good for issuer if rates fall; bad for investor.
- Zero-coupon bonds — no periodic coupon; sold at deep discount. All “interest” is the gap between issue price and face.
- Secured vs. unsecured — collateralised vs. backed only by issuer’s general credit.
- Subordinated debt — paid only after senior debt in liquidation. Higher yield to compensate.
Lesson recap
- Bonds = tradable long-term debt with face value, coupon, maturity.
- Issue price depends on coupon vs. market rate: par, discount, or premium.
- Discount/premium amortises over the bond’s life via effective-interest method.
- Interest expense ≠ cash paid until the bond matures.
- Common variants: convertible, callable, zero-coupon, secured.
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Practical Indian Application
Issuance and trading references: SEBI’s NCS Regulations 2021 for debt issuance norms; CRISIL/ICRA/CARE rating methodologies; debenture trustee databases; BSE Bond Platform and NSE Wholesale Debt Segment for secondary trading; Section 71 of Companies Act for DRR rules.
Worked Example — Reliance NCD Issuance
Imagine Reliance Industries issues ₹500 crore of 5-year NCDs on 1 April 2026 with 8% annual coupon, issue costs ₹5 crore. Net proceeds = ₹495 crore. Under Ind AS 109, EIR is calculated such that the present value of all future coupon and principal payments equals ₹495 crore — roughly 8.22%. Year 1 interest expense in P&L = 495 × 8.22% = ₹40.69 crore (composite of cash coupon ₹40 crore + amortised issue cost ₹0.69 crore). The journal: Dr Finance Cost ₹40.69 crore; Cr Bank ₹40 crore; Cr Debentures (amortisation) ₹0.69 crore. Over five years, the issue cost is fully amortised through P&L, and principal of ₹500 crore is repaid at maturity.
Common NCD Accounting Mistakes
- Expensing issue costs upfront instead of amortising over tenure
- Treating coupon as the full interest expense (ignore EIR)
- Missing DRR requirement for unlisted debentures
- Not deducting TDS at 10% on debenture interest under Section 193
Frequently Asked Questions
What is the difference between debentures and bonds in India?
No legal difference — debentures and bonds are both debt instruments. ‘Debenture’ is the Indian Companies Act term; ‘bond’ is the global term used for issues by governments and corporates.
Is debenture interest tax-deductible?
Yes, under Section 36(1)(iii) — interest paid on borrowings for business purposes is allowable. TDS at 10% under Section 193 applies to most debenture interest.
Who needs to maintain a DRR?
Public companies issuing debentures must maintain Debenture Redemption Reserve out of profits for redemption of debentures, per Rule 18 of the Companies (Share Capital and Debentures) Rules 2014.
NCD Investor Considerations
Indian NCD market offers retail investors yields of 8-11% vs bank FD 6-7%, but with credit risk. CRISIL/ICRA/CARE ratings of AAA/AA+/AA carry low default probability; A and below carry materially higher risk. Investors check the Debenture Trustee report quarterly for any covenant breach. Listed NCDs trade on NSE/BSE wholesale debt segment with TER (Total Expense Ratio) of brokerage 0.1-0.3% per trade. For issuers: Bond yields vs bank loans depend on (a) credit rating (better ratings access cheaper debt), (b) tenure (10-year bonds historically yield 50-100 bps over 5-year), (c) liquidity premium, (d) tax treatment of interest. Foreign-currency bonds (Reg S, 144A) and Masala Bonds add diversification to the issuer’s investor base.
Final Notes
The Bharat Bond ETF series launched by Edelweiss in 2019 transformed the Indian corporate bond market — passive ETFs holding AAA-rated PSU debt with fixed maturity dates, giving bond-like predictability with ETF liquidity. As of 2025, multiple maturities (2025, 2030, 2031, 2032) trade actively on NSE/BSE with bid-ask spreads of 5-10 bps. Bharat Bond’s AAA quality with no credit risk makes it ideal for parking corporate or institutional money — and for retail investors building debt allocations.
NCD Market Evolution and Investor Education
Indian NCD market has grown from ₹50,000 crore annual issuance in 2010 to ₹3,00,000+ crore by 2025 — a 6× expansion. Retail participation has grown via online bond platforms (GoldenPi, IndiaBonds, Wint Wealth, BondsKart) which democratise access. SEBI’s 2021 reforms reduced minimum investment to ₹10,000 face value, making NCDs accessible. Retail investors should understand: (a) Public NCD issues have 3-7 day subscription windows; (b) Secondary trading liquidity is uneven — popular issues trade tight, others have wide spreads; (c) Cumulative vs Annual interest options exist; cumulative builds value via reinvestment; (d) Call options favour issuer (may redeem early in falling-rate environment); (e) Tax treatment same as bank interest — TDS 10% above ₹5,000 per year, slab-rate taxable.