Posted in Finance, Accounting and Economics Terms, Total Reads: 301
Definition: Above Par
Every bond has a face value i.e. the nominal value or the set price of the bond that is being issued. The company have to pay coupon rate or amount every year as long as the company don’t pay back. Bonds are traded on open market just like stocks, commodities etc. But sometimes the trading value of the bond issued is more than the nominal price or the face value. For example, if the face value of the bond is Rs. 1000 so above par means bonds are selling at premium i.e. bond can be bought for more than Rs. 1000. This is because investors are ready to pay more for the same bond. So thus the price is determined by demand and supply of bonds in the open market.
Bonds are correlated with the prevailing interest rate i.e. when the interest rate falls bond price go up and when interest rate rise bond value will fall.
So for example when the bond is issued it have a stated value or price i.e. the face value, let it be Rs 1000. A bond with 3% coupon rate so the company have to pay Rs 30 annually. The company have to pay Rs 30 irrespective of the fluctuation in the market to the investor.
Now the bond price rises to Rs 1050 i.e. above its par value but the bond still pays Rs 30 as coupon rate but the yield to maturity i.e. the market interest falls. So the bond trades at premium or above par when the coupon rate is higher than the existing interest rate. So the investor could sell the bonds to get quick profits.
Market interest rate consistently change, and bonds changes their prices, so the yield to maturity rate is corresponding to the rates of bonds that are recently issued. Yields to maturity i.e. the market interest rate and bond prices are inversely correlated.