You may have seen the term "pay down" in your investment paperwork or financial statements and wondered what it means. Corporations use many financial terms to discuss money made by trading bonds, stocks and mutual funds. Knowing how much money you are making from your investments, based on how well a company is performing, is important to reaching your financial goals. For that reason, you need to understand what "pay down" can mean when managing your investments and deciphering your financial statements.
How a Pay Down Works
A pay down occurs when a company issues a new bond after an old one matures. Usually, the amount of the original bond exceeds the value of the new bond. When this happens, there is a reduction in the insurer's debt.
Companies can cut costs by refunding an outstanding bond amount issued to an investor. For example, if a company pays out $50 million in bond securities and issues $45 million in new bonds, a pay down occurs because the company is now $5 million less in debt, making the final deduction a pay down.
The Benefits of Bonds
You may already know that having bonds in your portfolio creates balance and builds strength against the volatility of investing. When companies take out these types of loans, you as the investor are lending the company money when you buy their bonds. On bonds, or debt securities, a pay down occurs when the amount of money repaid in a debt by a company exceeds the amount originally borrowed. When a company reissues unpaid debt for less than the original borrowed amount, it is essentially paying down the bond.
Use of Financial Statements
Whether for a person or company, a financial statement is a summary of an account, listing assets, liabilities and equity of ownership. The pay down information is part of the summary of long-term liabilities reported to the account holder on the balance sheet. Liabilities represent all of the debts a company has and will be paid out to bondholders in the near future. Most financial statements note that a bond will be "held to maturity," meaning the company plans to hold the bond until it matures, and provide a summary of the pay down amount after the maturity date.
After Pay Down
Corporations include information on pay downs as a way to keep investors interested in future investments. Once a pay down is accomplished, investors are able to reinvest in more stocks and bonds issued by the company. By understanding pay down on bonds and financial statements, investors make wiser choices in investments.
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