How to Calculate the Par Value of a Bond

A bond is essentially an IOU for a loan, where you are loaning money to a government, corporation, or other entity. The entity agrees to pay back your principal plus a certain amount of interest when the loan becomes due, or matures. Par value of a bond is its face value. You do not need to calculate par value when it is stated on the bond.

Difficulty: Easy

Instructions

Calculate Bonds With Key Information

1. Evaluate a bond before you buy it. Its par value, coupon rate and maturity date are the three key pieces of information you need to compare one bond to another.

2. Know that the face value of a bond is its redemption value, the amount of money you will receive when you redeem the bond. Bonds are designed to reach par value at maturity. Corporate bonds usually have par values of $1,000 while municipal bonds generally have face values of $500. Federal government bonds tend to have much higher face values at $10,000.

3. Learn the bond's coupon rate, the interest amount that is stated on a bond. It is determined upon issuance of the bond and expressed as a percentage. If interest rates are higher than the coupon rate, the bond gets sold below par value or "at a discount." If interest rates are lower than the coupon rate, the price of the bond is above par value or "at a premium."

4. Minimize risk or maximize gain by knowing a bond's maturity date. A bond with a short maturity date is less risky than one with a longer maturity date. That's because it is more predictable and there is less time for interest rates and prices to fluctuate. However, as a general rule, bonds with longer maturity dates pay more interest.

5. Calculate your potential earnings with the help of an online calculator (see Resources below). One example is a yield to maturity calculator, while another will calculate the current value of savings bonds.

Tips & Warnings

• A bond is only as good as its issuer's ability to pay back its debt. Investigate the issuer before you purchase a bond. Generally, bonds issued by stable governments are safer investments than those issued by new businesses. Governments can always raise more money to pay their debts by collecting taxes. A business, on the other hand, must generate profits to pay its debts and profits can be difficult to forecast.

Resources

• Use Morningstar for a yield-to-maturity calculator
• Use TreasuryDirect for a savings bond calculator