Question

1. What is the main difference between notes payable and bond payable? Explain in detail
2. What obligation does an entrepreneur have to investors that purchase bonds to finance the business? Explain in detail

Answer 1

Notes

Notes payable accounts that are maintained by the business owner represent the long-term liabilities that the business owner has. These liabilities are usually in terms of a loan that has been taken out to fund business development, research or daily business operations through periods of financial difficulty. The loans taken out for these purposes are generally lower in amount than what a business owner can expect to get through issuing a bond.

Bonds

Bonds are also a long-term debt obligation that the business owner has to its lenders, but the debt is of a different type and is usually much larger in scale. When a business loan will not suffice for the scope of the project or whatever expenses the business has planned, the business can issue bonds instead through the help of an investment banker. A bond issue allows the business to gather either long- or short-term loans from both individual and institutional investors who wish to receive a fixed rate of return on their money. Bonds are usually issued in large quantities but generally require investors to pay only around $5,000 for the principal, which is returned to them at the end of the bond term. In the meantime, they receive the income from the bond generated by the bond's interest rate.