Definition of “At Par”
The term “at par” is used within the financial markets to describe the situation in which a bond or other debt security is trading at its nominal or face value. When a financial instrument is “at par,” it implies that its market price is equivalent to its original issue value. This value is typically expressed as 100, meaning if a bond’s face value is $1,000, it is trading at $1,000 in the market.
Examples of “At Par”
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Corporate Bonds
- Suppose a company issues a bond with a par value of $1,000 and an annual coupon rate of 5%. If the bond is trading at $1,000, it is said to be “at par.”
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Government Securities
- A U.S. Treasury bond issued with a face value of $10,000 and is currently trading in the secondary market at $10,000 is trading “at par.”
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Preferred Stock
- Preferred shares are issued with a face or par value. If these shares trade on the stock exchange at this par value, they are trading “at par.”
Frequently Asked Questions (FAQs)
What does it mean if a bond is trading below par?
When a bond is trading below par, it means that its market price is less than its face value. This is often known as trading at a discount.
What does it mean if a bond is trading above par?
A bond trading above par indicates that its market price is higher than its face value. This situation is often referred to as trading at a premium.
How does the interest rate affect whether a bond trades at par?
The relationship between the bond’s coupon rate and the current interest rate environment determines its market price. If the coupon rate is higher than current interest rates, the bond may trade at a premium. Conversely, if it’s lower, it might trade at a discount.
Are there other financial instruments that can trade at par?
Yes, other financial instruments like preferred stock or some types of loans and promissory notes can also trade at par.
Does ‘at par’ imply a good investment?
Trading at par does not inherently indicate a good or bad investment. Investors should consider other factors like credit risk, interest rate risk, and the term of the bond.
Related Terms
Par Value
- The nominal or face value of a bond or preferred stock as stated by the issuer.
Face Value
- Another term for par value, it is the stated value of a financial instrument upon maturity.
Premium
- Refers to a bond or other security trading above its face value.
Discount
- Refers to a bond or other security trading below its face value.
Online References
- Investopedia: At Par Definition
- The Balance: Understanding Bonds and Their Prices
- SEC: Municipal Bonds
Suggested Books for Further Studies
- “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
- “The Handbook of Fixed Income Securities” by Frank J. Fabozzi
- “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
Accounting Basics: “At Par” Fundamentals Quiz
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