Definition
Bonded debt is the part of a corporation’s, state’s, or municipality’s total indebtedness that is represented by bonds it has issued. It is essentially the amount of money borrowed through the issuance of bonds, which require the issuer to repay the principal along with periodic interest payments.
Examples
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Corporate Bonded Debt: A corporation issues bonds to raise capital for expanding its operations. The total amount of money raised through these bonds and owed to bondholders constitutes the corporation’s bonded debt.
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Municipal Bonded Debt: A city issues municipal bonds to fund the construction of public infrastructure like roads and schools. The money borrowed through these municipal bonds is part of the city’s bonded debt.
Frequently Asked Questions (FAQs)
What is the difference between bonded debt and other forms of debt?
Bonded debt specifically refers to debt obligations arising from the issuance of bonds, which are fixed-income securities that require scheduled interest payments and the repayment of principal. Other forms of debt might include loans from banks or other financial institutions, credit lines, or payables which do not involve a bond issuance.
How do bonds work?
Bonds are debt securities that require the issuer to pay interest periodically and repay the principal amount on a fixed maturity date. Investors who buy the bonds are lending money to the issuer in return for these payments.
Why do corporations and governments issue bonds?
Issuing bonds allows corporations and governments to borrow sizable amounts of money at potentially lower interest rates compared to bank loans. This mechanism also provides investors with a relatively secure investment in the form of fixed-income securities.
Are there risks associated with bonded debt?
Yes, the primary risks include the issuer’s default risk (the risk that the issuer might not be able to make interest or principal payments), interest rate risk (the impact of fluctuating interest rates on bond prices), and market risk (the potential for unfavorable market conditions affecting the bonds’ value).
How is bonded debt recorded on financial statements?
Bonded debt is recorded as a long-term liability on the issuer’s balance sheet. The periodic interest payments are recorded as expenses on the income statement, reducing the profitability for the period in which the interest is paid.
Related Terms
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Bond: A fixed-income instrument that represents a loan made by an investor to a borrower. Bonds include terms for interest payments and the return of principal at maturity.
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Corporate Bonds: Bonds issued by corporations to raise funding for business activities. These typically offer higher interest rates than government bonds due to higher risk.
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Municipal Bonds: Bonds issued by local government entities (cities, states, municipalities) to finance public projects. These bonds often provide tax-free interest income to investors.
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Debt Obligation: Any form of binding agreement to repay borrowed money, including both bonded and non-bonded debts.
Online Resources
- Investopedia – Bonds
- U.S. Securities and Exchange Commission – Bonds
- Municipal Securities Rulemaking Board (MSRB)
Suggested Books for Further Studies
- “Investing in Municipal Bonds: How to Balance Risk and Reward for Success in Today’s Bond Market” by Philip Fischer
- “The Bond Book, Third Edition: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More” by Annette Thau
- “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman
Fundamentals of Bonded Debt: Finance Basics Quiz
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