What is the par value of a bond?
This is the unit of measure, or denomination, of a bond. The par value should not be confused with the price or the market value of a bond. While a bond’s price and therefore market value fluctuate, the par value remains constant.
The par value of a bond serves the following purposes:
- It indicates the value of the final payment that would normally be received at maturity. For example, if a bond has a face value of £100, it means that the final payment receivable by the bond holder is £100. There are some exceptions to this rule:
- Amortising bonds: These bonds repay part of their par value through the life of the bond. Therefore the final payment will be the par value of the bond, less the amortisation payments made throughout the life of the bond.
- Inflation linked bonds: These bonds take into account inflation and the payment at maturity reflects the increase in an inflation index over the life of the bond.
- It acts as a unit of measure of coupon payment. If a bond has a 10% coupon and par value of £1,000, it means that it will pay coupon of £100 per annum (calculation: £1,000 X 10/100 = £100).
- It acts as a basis for price quotation. A bond’s price is quoted as a percentage of par value and is derived as follows:
Bond Price= ,Market Value-Par Value ×Price Factor. ×100
A bond with a par value of £5,000 and a price of 103 has a market value of £5,150 (calculation: £5,000 X 1.03 = £5,150).
The price factor in the above equation is 1 for conventional bonds. For amortising bonds and inflation linked bonds the price factor reflects the adjustments required to account for past amortisation or inflation indexing when quoting the price.
The par value is also referred to as face value or nominal value. When a bond’s market value is the same as its par value, it is said to be trading at par. If a bond is trading above par value it is said to be trading at premium and when trading below par value is said to be trading at discount.