Above Par

Detailed Definition

Above Par refers to a situation where a security, most commonly a bond, is trading at a price higher than its face value (also known as par value). For instance, if a bond has a par value of $1,000 but is currently trading at $1,050, it is said to be trading above par. This often occurs when the fixed interest rate (coupon rate) of the bond is higher than the prevailing rates in the market, making the bond more attractive to investors.

Examples

1. Corporate Bond:

   • A corporate bond with a par value of $1,000 is being traded on the bond market for $1,100. In this case, the bond is trading above par because its market price exceeds its face value by $100.

2. Municipal Bond:

   • A municipal bond with a par value of $5,000 is currently quoted at $5,250 in the bond market. This bond is also trading above par because its selling price is higher than its par value.

3. Treasury Bond:

   • A U.S. Treasury bond with a par value of $10,000 is being sold for $10,500. Here, the bond is over par, as buyers are willing to pay more than the face amount.

Frequently Asked Questions

Q1: Why do bonds trade above par? A1: Bonds trade above par when their fixed coupon rate is higher than the prevailing interest rates, making them more attractive to investors. This can also happen if the issuing entity’s creditworthiness improves or if there is a general increase in bond demand.

Q2: Can stocks trade above par? A2: Yes, stocks can trade above their par value, though par value is often set very low for stocks and is not as significant as it is for bonds.

Q3: What is the impact of a bond trading above par on yield? A3: When a bond trades above par, its yield to maturity is generally lower than its coupon rate because investors pay more initially but receive the same nominal interest payments.

Related Terms

1. Par Value: The nominal or face value of a bond or stock as stated by the issuing entity. For bonds, this is the amount paid to the holder at maturity.
2. Coupon Rate: The annual interest rate paid on a bond, expressed as a percentage of the face value.
3. Yield to Maturity (YTM): The total expected return of a bond if it is held until it matures, considering its current market price, coupon payments, and maturity value.
4. Discount Bond: A bond trading below its par value.
5. Premium Bond: Another term for a bond trading above its par value.

Online References

1. Investopedia: Above Par Definition
2. Investopedia: Understanding Bonds
3. Khan Academy: Bond Pricing

Suggested Books for Further Studies

1. “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
2. “The Bond Book” by Annette Thau
3. “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
4. “Investing in Bonds For Dummies” by Russell Wild

Accounting Basics: “Above Par” Fundamentals Quiz

Thank you for exploring the world of bond trading and tackling our sample quiz questions. Keep enhancing your financial acumen!