How to Find the Par Value of a Bond
Bonds are similar to the CDs (certificates of deposit) you get at a bank as a way to earn interest on your savings. However, bonds are issued by local, state, and national governments, or by corporations, and are traded on financial markets, much like stocks. An investor loans money to the issuer and the bond is the IOU. Bonds are a good way to invest money, but to do so wisely, you need to understand what the bond’s par value means and how it can help you evaluate the bond’s earning potential and risk.
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Bonds are issued in varying amounts. Most often, ones issued by corporations have a par (or face) value of $1,000. Municipal bonds (issued by a city government) commonly have par values of $100. Treasury bonds issued by the federal government have par values of $10,000 in most cases. The par value is the value the bond will have at maturity—that is, the amount the issuer will have to pay to redeem the bond and pay off his debt.
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A bond pays a certain amount of interest, called the coupon rate, based on its par value. If the bond has a coupon rate of 8 percent and a par value of $1,000, the bond pays $80 in interest each year. When the coupon rate is higher than prevailing interest rates, the bond’s price will normally be higher than the par value, meaning that you will buy the bond "at a premium." If the coupon rate is lower than prevailing interest rates, the bond's price will fall below the par value, and you will buy it "at a discount."
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Find out the date the bond matures. Bonds are usually issued for anywhere from one to 30 years, although they are occasionally issued for as little as one day. At the other extreme, some bonds have maturities of 100 years. A bond with a short maturity (like one year) has less risk than one with a long maturity. The reason is that it is less certain what will happen over the next 10, 20 or 30 years than within a year or two.
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Check a bond’s rating with a ratings service like Moody’s. (Follow the link in Resources). Bonds are rated based on their stability, creditworthiness and other factors that will affect the issuer’s ability to pay off the bond when it matures. Knowing the assessed risk is important, since it affects the price (and your chances of getting your investment back!). Stable governments usually have the lowest risk. Among corporate bonds, the lowest risk bonds are called “blue-chip” bonds.
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Figure out the interest rate (yield) of a bond. When you find the par value of a bond, this does not tell you the rate of interest it pays. The actual interest rate on a bond depends on how much you pay for it, not on its par value. Calculating the yield can get complicated. However, there are free online yield calculators you can use. Follow the Morningstar link in Resources to use a yield calculator.
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