You’d still earn the same $40 in interest—it would simply represent a smaller percentage of what you paid for your bond. A bond with a par value of $1,000 and a coupon rate of 4% will have annual interest payments of $40 or 4% x $1,000. Par value is a primary component of fixed-income securities and represents the value of a contractual agreement between the issuing party and the bondholder.
Why is a bond price above par?
With interest rates constantly changing, it is uncommon for a bond’s coupon rate to match exactly with the market interest rate and be priced at par. For the bond above, the coupon rate is below the market interest rate. In such a scenario, a rational investor would only be willing to purchase this bond at a discount to its face value because its coupon return is lower than the current market interest rate. In other words, the bond is generating a return lower than the market, and investors would only be willing to purchase the bond if it was issued at a discount.
The face value of the bonds is equal to $1,000, which is the amount the issuer must repay in ten years once the bond reaches maturity. The Par Value is the face value (FV) on the issuance of securities like bonds or stocks, as established on the issuer’s security certificate. An investor can identify no-par stocks on stock certificates as they will have “no par value” printed on them. The par value of a bond is the amount of money the issuer promises to repay bondholders at maturity. The terms par value and face value are interchangeable and refer to the stated value of a financial instrument at the time it is issued. Value Broking is dedicated to offering comprehensive information and addressing queries related to online share trading.
This was far more important in unregulated equity markets than in the regulated markets that exist today,
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