When a business or individual borrows money, the amount borrowed is termed the principal balance. Borrowing can take several forms, including bank loans or bonds sold to investors. As the borrowed money is repaid, the principle balance decreases. At any point in time, the outstanding debt consists of the unpaid principal amount plus any accrued interest that has not been paid.
Outstanding Debt Illustration
Suppose a company borrows $50,000. This is the initial principal balance and includes cash the company gets plus any upfront fees charged by the lender. After a year, the company has paid off part of the loan, but still has an unpaid principal balance of $30,000. In addition, $300 in interest has accrued but has not yet been paid. The outstanding debt comes to $30,300. Bonds issued by a company work a bit differently since none of the principal is paid off until a bond matures. The company pays only the interest on the bond until maturity, at which time the principal is paid in one lump sum. At any given time, the outstanding debt represented by the bond is the sum of the principal plus any unpaid interest.
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