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. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ...
  2. Why should I keep records on my tax-exempt bond transactions?

    Keep your purchase records on all investments, including tax-exempt bonds. Though the interest is tax-free, you may owe taxes ...
  3. How long will it take for a bond to reach its face value?

    Learn when different savings bonds reach face value, and determine the best time to cash them in to get the highest return ...
  4. How long can I hold my HH/H Bonds and still earn interest?

    Take advantage of your bond investment and learn how long you can hold on to your Series H/HH Bonds and still earn interest ...
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 ...

You May Also Like

Related Articles
  1. Promising high yields that the Eurozone and U.S. can't match, West African sovereign debt has caught the attention of savvy investors.
    Bonds & Fixed Income

    Interested In West African Debt? Look ...

  2. Pimco has stabilized its Total Return fund, but its returns are still shaky and its sales load is still a fat one.
    Professionals

    A Look At Pimco's Total Return Fund ...

  3. With the addition of 'Bond King' Bill Gross, Janus is a changed firm. Here's what its fund lineup looks like now.
    Investing Basics

    How Does Janus's Fund Lineup Look Now?

  4. Blackrock has lowered its fees to snag money leaving Pimco's bond funds. But by how much and who's following suit? Read on.
    Investing Basics

    Thank You, Pimco: BlackRock Drops Bond-Fund ...

  5. What is the difference between corporate bonds and preferred stock? The following are a list of pros and cons for each investment.
    Trading Strategies

    Preferred Stocks versus Bonds: How to ...

Trading Center