It is important to realize that a company or a government can issue bonds when they need a source of long-term cash financing

It is important to realize that a company or a government can issue bonds when they need a source of long-term cash financing. When an organization issues bonds, investors are likely to pay less than the face value of the bonds when the stated interest rate on the bonds is lower than the prevailing market interest rate. By doing so, investors will get a higher return on their reduced investment. If so, the issuing entity stores the amount of this discount (the difference between the nominal value and the amount paid) in a counter-liability account, and amortizes the amount of this reduced payment during the term of the bonds, That increases the amount that business records as interest expense. The net result is a total recognized amount of interest expense over the life of the bond that is greater than the amount of interest actually paid to investors. The amount recognized is equal to the market interest rate on the date the bonds were sold.