If the price of the bond falls, does that mean the company won't pay me the par value?

By Investopedia Staff AAA
A:

When you buy a bond, you are loaning money to the issuer. Because a bond is a loan, the interest paid to the bondholder is payment for lending the money. The interest payable is stated as a percentage of the amount borrowed, known as the par value of the bond. Thus, a bond with a par value of $1,000 and an interest rate of 10% promises to pay $100 per year in interest until the bond matures, at which point the original par value ($1,000) is returned to the bondholder.

Although a bond has a fixed par value, the prices at which it is bought and sold in the financial market may be either higher, lower or equal to par. For example, if the market interest rate is 10%, then a bond paying 10% interest will sell for par value. However, if the market interest rate rises to 11%, no one will pay par value because identical bonds that pay an 11% rate are available. This causes the price of the bond to fall until the interest payable plus the gain earned by the difference between par value and the lower price paid yields an 11% return.

For the same reason, when the market interest rate falls, bond prices increase. This scenario demonstrates the basic principal between interest rates and bond prices; when one goes up the other goes down. Because market interest rates fall and rise constantly, so do bond prices. However, the par value of a bond, the amount you will receive at maturity, will never change regardless of the market rate or bond price.

If the market interest rate is higher than the interest payable on a bond, the bond is said to be selling at a discount (below par value). If the market interest rate is lower than the interest payable on a bond, it is said to be selling at a premium (above par). And, if the market interest rate equals the interest payable, the bond will sell for par. The par value itself, and thus the value of a bond payable upon maturity, will never change, regardless of the bond price or market interest rates.

(For further reading on this subject, please see our Bond Basics Tutorial.)

RELATED FAQS

  1. I want to invest my emergency fund to earn interest. What is a relatively safe and ...

    When considering where to put your emergency money, a key consideration is making sure you'll be able to access the money ...
  2. How does the money from the interest on my bond get to me?

    When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face ...
  3. The security which offers the best protection against purchasing power risk or inflation ...

    a. fixed annuityb. common stockc. treasury bondd. certificate of deposit Answers: bDebt securities and investments that promise ...
  4. How are bonds rated?

    Moody's, Standard and Poor's, Fitch Rating and Dominion Bond Rating Service are some of the internationally well-known bond ...
RELATED TERMS
  1. Class 3-6 Bonds

    Several classes of noninvestment grade bonds held by an insurance ...
  2. Impact investing

  3. Promotional CD rate (Bonus CD rate)

    A limited-time offer of a higher rate of return on a certificate ...
  4. Direct Bidder

    An entity that purchases Treasury securities at auction for a ...
  5. Indirect Bidder

    An entity that purchases Treasury securities at auction through ...
  6. Bid Wanted

    An announcement by an investor who holds a security that he or ...
comments powered by Disqus
Related Articles
  1. Understanding The Bond Behemoth That ...
    Mutual Funds & ETFs

    Understanding The Bond Behemoth That ...

  2. Fund Firm Jolts: Pimco's Isn't The First ...
    Investing News

    Fund Firm Jolts: Pimco's Isn't The First ...

  3. Alternatives To Pimco's Total Return ...
    Bonds & Fixed Income

    Alternatives To Pimco's Total Return ...

  4. What To Expect From Pimco After Bill ...
    Investing News

    What To Expect From Pimco After Bill ...

  5. Pimco Investor? Consider This Before ...
    Investing News

    Pimco Investor? Consider This Before ...

Trading Center