principal payment

(noun)

The payment made upon maturity of a bond

Related Terms

Examples of principal payment in the following topics:

  • Accounting for Interest Earned and Principal at Maturity

    • At maturity, firms should debit cash and credit held to maturity investments the balance of the principal payment.
    • When money is borrowed, interest is typically paid to the lender as a percentage of the principal, the amount owed to the lender.
    • As long as all due payments have been made, the issuer has no further obligations to the bond holders after the maturity date.
    • During the life of the debt held to maturity, the company holding the debt will record the interest received at the designated payment dates.
    • If a company paid $10,000 for 8% bonds, a journal entry is required to record the payment of principal at maturity.

  • Zero-Coupon Bonds

    • A zero-coupon bond is a bond with no coupon payments, bought at a price lower than its face value, with the face value repaid at the time of maturity.
    • It does not make periodic interest payments, or have so-called "coupons," hence the term zero-coupon bond.
    • In other words, the separated coupons and the final principal payment of the bond may be traded separately.
    • Investment banks or dealers separate coupons from the principal of coupon bonds, which is known as the "residue," so that different investors may receive the principal and each of the coupon payments.
    • "STRIPS" stands for Separate Trading of Registered Interest and Principal Securities.

  • Bonds Issued at Par Value

    • The affected accounts will be interest expense and cash, and the journal entry will be as follows: Interest Expense $70 Cash $70At bond expiration, the creditor must make a journal entry for the last interest payment and the retirement of the bond through principal payment.
    • Finally, it pays off the obligation by repaying the face amount and the last interest payment.
    • Bond Interest Expense - debit interest payment (increase interest expense line)
    • First, it must record any final interest payments that are made.
    • Then, it must record the bond principal being paid off.

  • Bonds Payable and Interest Expense

    • The borrower promises to pay (1) the face value or principal amount of the bond on a specific maturity date in the future, and (2) periodic interest at a specified rate on face value at stated dates, usually semiannually, until the maturity date .
    • Valley made the required interest and principal payments when due.
    • To record periodic interest payment.
    • Each year Valley would make similar entries for the semiannual payments and the year-end accrued interest.
    • Summarize how a company would record the original issue of the bond and the subsequent interest payments

  • Coupon Interest Rate

    • Such bonds make only one payment–the payment of the face value on the maturity date.
    • The bondholder receives the full principal amount on the redemption date.
    • Inflation linked bonds (linkers), in which the principal amount and the interest payments are indexed to inflation.
    • However, as the principal amount grows, the payments increase with inflation.
    • A coupon payment on a bond is a periodic interest payment that the bond holder receives during the time between when the bond is issued and when it matures.

  • Annuities

    • An annuity is a type of multi-period investment where there is a certain principal deposited and then regular payments made over the course of the investment.
    • The payments are all a fixed size.
    • In return you make an initial payment (down payment), and then payments each month of a fixed amount.
    • Mortgage payments are usually ordinary annuities.
    • Perpetuities: Payments continue forever.

  • Payments

    • Cash payments describe cash flowing out of a business.
    • Cash payments must be made for relevant expenses.
    • Typical payments include those to:
    • Repayment of principal and interest on company's own bonds or notes
    • A firm may delay payments by:

  • Annuities and Mortgages

    • Consequently, they only differ when payment is applied to the annuity account and when payments begin earning interest.
    • An amortization table itemizes every payment for a mortgage loan and decomposes every payment into interest and the amount that reduces the principal.
    • If your payment is $14,594, then $7,200 is the interest while the remainder reduces the principal.
    • First payment has the highest interest while the lowest principal applied to the loan balance.
    • A balloon payment is a person pays a low monthly payment every month.

  • Maturity Date

    • Maturity date refers to the final payment date of a loan or other financial instrument.
    • In finance, maturity date or redemption date, refers to the final payment date of a loan or other financial instrument, at which point the principal (and all remaining interest) is due to be paid.
    • As long as all due payments have been made, the issuer has no further obligations to the bond holders after the maturity date.
    • However, it is important to note that bonds are sometimes "callable,"which means that the issuer of the debt is able to pay back the principal at any time.
    • Bonds can also be puttable, meaning that the holder has the right, but not the obligation, to demand early repayment of the principal.

  • Principle-Agent Problem

    • In economics, the principal-agent problem (also known as an agency dilemma) exists when conflicts of interest arise between a principal and an agent in a business setting .
    • Examples of relationships that can experience the principal-agent problem include:
    • Principals offer various incentive structures, which are rewards or motivating factors that drive the agent to work in the best interest of the principal and complete tasks efficiently.
    • For the principal, agent inefficiency results in sub-optimal results and low welfare.
    • For the agent, efficiency is important in order to receive payment for work completed.