The term “at par” signifies trading at face value. Bonds, preferred stock, or other debt instruments may trade at par, below par, or above par.
Par value is static, unlike market value, which fluctuates with factors like credit ratings, time to maturity, and interest rate changes. Par value is assigned when the security is issued. Historically, when securities were issued in paper form, the par value was printed on the face of the document, hence the term “face value.”
Key Takeaways
- Par value is the price at which a bond was issued, also known as its face value.
- A bond’s price fluctuates based on prevailing interest rates, time to maturity, and credit ratings, leading the bond to trade either above par or below par.
- “At par” always refers to the original price at which the bond was issued.
- The bondholder receives its par value at the bond’s maturity date.
Understanding at Par
Due to constant fluctuations in interest rates, bonds and other financial instruments rarely trade exactly at par. A bond’s trade price diverges from par based on whether current interest rates are higher or lower than the bond’s coupon rate, the specified interest rate it offers.
A bond quoted at par would be described as trading at 100, indicating it trades at 100% of its par value. A quote of 99 signifies trading at 99% of its face value.
For common stock, par value holds an outdated form. Through its charter, the company promises not to sell its stock for less than its par value. Par value shares are typically issued at one penny, with no impact on the stock’s actual market value.
Issuing a New Bond
When a company issues a new bond and receives the face value, the bond is said to have been issued at par. If the issuer garners less than the face value, it’s issued at a discount. If more, it’s issued at a premium.
The yield on bonds and the dividend rate for preferred stocks significantly determines whether new security issues are at par, at a discount, or at a premium.
A bond at par equates its yield to its coupon rate, mindful of the risk taken on by investing in that bond.
Example of Trading at Par
Consider a company issuing a bond with a 5% coupon. If similar bonds have prevailing yields of 10%, investors will pay less than par value to offset the rate difference. The bond’s value upon maturity plus the accrued yield must reach at least 10% to attract buyers.
Conversely, if prevailing yields are lower (say, 3%), an investor may willingly pay more than par for a 5% coupon bond. As a result, investors get the coupon benefit but have to spend more due to the lower prevailing yields.
Understanding Bond’s Par Value
A bond’s par value is its face value, usually set at $1,000 or $100 at issuance. Over time, the bond’s price might change due to shifts in interest rates, credit ratings, and time to maturity. Thus, a bond can trade either above its par value (above par) or below it (below par).
Are Bonds Always Issued at Par Value?
No, bonds aren’t always issued at par. They may also be issued at a premium (price higher than par) or at a discount (price below par). This issuing price depends largely on current market interest rates. For instance, if a bond’s yield surpasses market rates, it may trade at a premium. If below market rates, it trades at a discount to attract more buyers.
What Is a Bond’s Coupon Rate?
A bond’s coupon rate specifies the interest it pays an investor on issuance. It differs from a bond’s yield, which is the effective rate of return when the bond’s price changes. Yield is calculated as coupon rate / current bond price.
Related Terms: face value, below par, above par, credit ratings, coupon rate, premium bond, discount bond.
