Par Bond
A par bond is a bond that is issued and sold at its face value, or “par value.” The par value of a bond is the amount that the issuer agrees to pay the bondholder when the bond matures. For example, if a bond has a par value of $1,000, the issuer sells the bond for $1,000 and agrees to pay the bondholder $1,000 upon maturity.
In the bond market, bonds can trade at a premium (above their par value), at a discount (below their par value), or at par (equal to their par value), depending on various factors such as interest rates, the creditworthiness of the issuer, and the length of time until maturity. However, when they are first issued, par bonds are sold at their face value.
The interest paid on a par bond is based on its face value. For example, if a $1,000 par bond has a 5% interest rate, the issuer will pay the bondholder $50 per year until the bond matures.
It’s important to note that the concept of par value applies not only to bonds but also to other securities such as shares of stock. In the context of stocks, the par value (which is often a very small amount) is the value assigned to the shares when they are first issued.
Example of a Par Bond
Imagine Company XYZ issues a 10-year bond with a par value of $1,000 and an annual coupon rate of 5%. This means that the bond is sold for $1,000 (which is the amount the company receives from the bondholder), and the company promises to pay the bondholder 5% of the par value ($50) every year for the next 10 years. At the end of the 10-year term, the company will repay the par value of $1,000 to the bondholder.
So, if you purchase this bond, you will pay $1,000 upfront. Then, every year for 10 years, you will receive $50 (which is 5% of $1,000) in interest. At the end of the 10 years, you will get your initial $1,000 investment back.
Please note, the market price of the bond can fluctuate after its initial issuance based on changes in interest rates, the issuer’s creditworthiness, or other market conditions. If you sell the bond before maturity, you may receive more or less than the bond’s par value, depending on the bond’s market price at that time.
