Bonds and Notes Payable have many purposes and transactional characteristics in common. They stand for debt instruments that businesses use to raise funds for specific projects. Both transactions include written agreements detailing repayment terms, interest rates and lump sum payments due at the maturity of the predetermined time period between the corporation and the lender.
Assume that a business took out a note payable for N50,000,000 with a two-year maturity date and an interest rate of 8% per annum paid quarterly. Additionally, it concluded the issuance of a N250,000,000 ten (10) year Bond with a 6% Coupon rate payable quarterly. The payable Bond as well as the payable Note are long-term liabilities on the company’s statement of financial position. Interests accrued during the year are treated similarly as expenses incurred in the period.
Securities rules are the main factor that distinguishes Bonds from notes payable. While Notes Payable are not always regarded as Securities, Bonds are usually regarded as Securities and are governed as such. Mortgage Notes, Commercial paper, and other Short-term Notes, for instance, are expressly excluded from the definition of securities under market laws. Other Payment Notes may also be securities, but only to the extent permitted by law, convention, and regulation.
The simplest approach to tell whether a Debt is more likely to be a Bond or a Note is often to look at its duration. The majority of loans are most likely to be categorised as Notes if they are short-term, or have a maturity of less than a year.
An example of this principle is how the Nigerian Financial Market classifies its own Debt offerings. The maturity of a Treasury Note ranges from one to ten years. The maturity of a Treasury Bond is more than ten years. Treasury Bills are short-term Securities with maturities of less than one year.
Ordinarily, Bonds are seen to have a longer maturity period. Hence, would require a High Coupon rate. However, where the Credit Rating is high or the probability of default on such a Bond is low. it then implies the Coupon rate offered would be low. On the other hand, Notes payable which happens to be short term would require a low Coupon rate. Where the Credit Rating is low or the probability of default on such a Bond is high. it then implies the Coupon rate offered would be high.
These differences, which are based on loan maturity, are mostly arbitrary. When evaluating whether a Debt is a Bond or a Note payable, the same fundamental principle applies.
The fact remains that Bonds and Notes payable are virtually the same from a practical standpoint, with duration as the major striking difference. Both are forms of Debt that businesses employ to pay for specific projects, expansion, or capital investments. However, the difference between the two financial instruments, though often negligible, depends majorly on investors’ risk appetite and investment horizon.