Question

Fleeson Company needs additional funds to purchase equipment for a new production facility and is considering either issuing bonds payable or borrowing the money from a local bank in the form of an installment note. How does an installment note differ from a bond payable?

Answer 1

A bond is an interest-bearing note that requires periodic interest payments and repayment of the face amount of the bonds at maturity. Bonds consist of two different components:
(1) interest payments made periodically over the life of the bond and (2) the face amount that must be repaid at maturity.

The periodic payments consist entirely of interest, and the final payment at maturity consists entirely of principal.

Installment notes, on the other hand, have periodic payments that consist partially of interest and partially of principal. Each payment reduces the principal on the note so that at maturity the entire amount borrowed will have been repaid.