What Is At Par?
Let me explain what 'at par' means—it's simply at face value. You see, a bond, preferred stock, or other debt instrument can trade at par, below par, or above par.
Par value is fixed, but market value shifts with things like credit ratings, time to maturity, and interest rates. I assign the par value when the security is issued. Back when securities were paper, you'd find the par value printed right on the face, which is why we call it 'face value.'
Key Takeaways
Bonds generally trade at, above, or below par based on market interest rate fluctuations, time to maturity, and credit quality— this shows how external factors influence a bond's market price compared to its face value.
When something trades 'at par,' it means the bond or preferred stock is valued at its original face value, and that value resets at maturity no matter the interim price changes from economic factors.
The coupon rate of a bond sets its initial interest payment and acts as a baseline for deciding if the bond should be issued at a discount or premium relative to current market rates.
New bonds might not always issue at their par value; they could sell at a discount or premium based on interest rate changes, which reflects investor demand tied to yield attractiveness.
Exploring the Dynamics of Trading at Par
Interest rates are always fluctuating, so bonds and other financial instruments rarely trade exactly at par. If current interest rates are above or below the bond's coupon rate— that's the interest it yields— the bond won't trade at par.
A bond trading at par gets quoted at 100, meaning it's at 100% of its par value. A quote of 99 means it's at 99% of face value.
For common stock, par value is more of an old-fashioned thing. In the company's charter, they promise not to sell stock below par value, so shares often issue with a par of one penny. This doesn't affect the stock's real market value.
Issuing Bonds: At Par, Discount, or Premium
When a company issues a new bond and receives the face value, we say it's issued at par. If they get less, it's at a discount. If more, it's at a premium.
Bond yields and dividend rates for preferred stocks play a big role in whether securities issue at par, discount, or premium.
A bond trading at par has a yield equal to its coupon. Investors expect a return matching the coupon for the risk of lending to the issuer.
Practical Example: Understanding At Par
Take a bond with a 5% coupon, but similar bonds yield 10%— investors will pay less than par to make up the rate difference. The bond's maturity value plus its yield must hit at least 10% to draw buyers.
If prevailing yields are lower, like 3%, an investor will pay more than par for that 5% bond. They'll get the coupon but pay extra due to lower market yields.
What Is a Bond's Par Value?
A bond's par value is its face value, the price at issuance. Most bonds issue at $1,000 or $100 par. Over time, the price changes with interest rates, credit ratings, and time to maturity. When that happens, the bond's price goes above par or below par.
Are Bonds Always Issued at Par Value?
No, bonds aren't always issued at par value. They can issue at a premium (higher than par) or discount (below par). This depends on current market interest rates. For instance, if a bond's yield is higher than market rates, it trades at a premium. If lower, it trades at a discount to become more attractive.
What Is a Bond's Coupon Rate?
The coupon rate is the stated interest the bond pays at issuance. It's different from the bond's yield, which is the effective return when the price changes. You calculate yield as coupon rate divided by current bond price.
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