- A bond is a debt instrument a company or government sells to investors. The money collected from the bond issue is used for a variety of business purposes. A government may finance wars, build infrastructure or use the money to pay welfare benefits to citizens. Companies may use bonds to expand an existing business enterprise.
- Total interest of a bond is the amount of money that the bond issuer pays over the life of a bond. This can include the total amount of the discount in the bond if it is a zero coupon bond. For these types of bonds, a discount of $50 on a $100 bond would mean that the total interest paid over the life of the bond would be $50 if held to maturity. For interest-bearing bonds, the total interest is the total volume of interest which is paid. For example, the interest rate of a bond may pay 6 percent annually. However, this doesn't specify how much, in total dollars, is paid out by the bond issuer. The total amount of money paid represents the total interest of the bond and represents its cost.
- A simple formula used to determine the total expenses of a bond is to subtract the total amount borrowed through the bond to the total amount repaid. For example, if a bond issuer issued bonds which totaled $100,000, and repaid $250,000, then the total cost of the bond is $150,000. This is calculated by subtracting the total repayments from the amount borrowed.
- If a business or government cannot use the bond receipts to produce more future income, then the bond may not be beneficial for the organization. If bond debt exceeds the organization's ability to repay, the organization is in danger of becoming insolvent. This means the organization must file bankruptcy, reorganize its debt or shut down operations. Knowing how to calculate bond interest prior to issuing bonds may reduce the probability of a company over-extending itself, as it will know in advance how much its debt will cost the organization.
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