What is Bonds and Their Types?
A bond is a debt security through which an entity (the issuer) borrows funds from investors in exchange for periodic interest payments and the repayment of the principal at maturity. Bonds come in various types, such as fixed-rate, floating-rate, zero-coupon, convertible, and callable, and are accounted for under IFRS 9.
How It Works
- The issuer determines the par value, coupon rate, and maturity, then markets the bonds to investors.
- On issuance, the issuer recognises cash received and a financial liability at the present value of future cash flows.
- Interest is recognised over the bond’s life using the effective interest method.
- On maturity or early redemption, the liability is settled and any gain or loss is recognised in profit or loss.
Saudi Context
Saudi Arabia’s debt market includes government bonds, sukuk (sharia-compliant bonds), and corporate bonds traded on Tadawul. The Saudi Public Investment Fund and SAMA-supervised banks issue sukuk regularly. ZATCA accepts effective interest method treatment under IFRS 9, including for sharia-compliant instruments.
Example
A Saudi company issues a SAR 100 million bond at par with a 5% annual coupon and 5-year maturity. It recognises a SAR 100 million liability and SAR 5 million interest expense each year under the effective interest method.