Par Value

Definition

Par value is the nominal or face value of a bond, which is the amount the issuer promises to pay the bondholder at maturity. It is the value printed on the bond certificate and represents the amount the issuer will repay the investor when the bond matures.

5 Must Know Facts For Your Next Test

1. Par value is used as the basis for calculating a bond's coupon payments and the amount the issuer will repay the investor at maturity.
2. Bonds are typically issued at par value, meaning the initial purchase price is equal to the par value.
3. The par value of a bond does not change over the life of the bond, even as the market price fluctuates.
4. When a bond's market price is above its par value, it is trading at a premium, and when it is below par, it is trading at a discount.
5. Par value is an important factor in bond valuation, as it determines the final payment the investor will receive at maturity.

Review Questions

• Explain the role of par value in the characteristics of bonds.
  • Par value is a fundamental characteristic of bonds that determines the amount the issuer will repay the bondholder at maturity. It serves as the basis for calculating the bond's coupon payments, which are a percentage of the par value. The par value remains constant throughout the bond's life, even as the market price fluctuates. Understanding par value is crucial in understanding the overall structure and features of a bond.
• Describe how par value influences the bond valuation process.
  • Par value is a key input in the bond valuation process. The par value, along with the bond's coupon rate and time to maturity, are used to calculate the bond's expected future cash flows. These cash flows are then discounted at the prevailing market interest rate to determine the bond's fair market value. If a bond is trading at a premium or discount to its par value, it indicates that the market interest rate has changed relative to the bond's coupon rate, affecting the bond's valuation.
• Analyze the importance of par value when using spreadsheets to solve bond problems.
  • When using spreadsheets to solve bond problems, par value is a critical input that must be accurately accounted for. Par value is used to calculate the bond's coupon payments, the final maturity payment, and the bond's yield to maturity. Accurately inputting the par value ensures that the bond's cash flows are correctly modeled, allowing for accurate valuation and analysis of the bond's performance. Failing to properly incorporate par value into bond calculations can lead to significant errors in the analysis.

Related terms

Bond Valuation: The process of determining the fair market value of a bond based on its expected future cash flows and the prevailing market interest rates.

Coupon Rate: The annual interest rate paid on a bond, expressed as a percentage of the par value.

Yield to Maturity: The annual rate of return expected on a bond if it is held until the maturity date, taking into account the bond's current market price, par value, coupon rate, and time to maturity.