Debt Securities - Bond Pricing
Once issued, corporate bonds trade in the secondary market between investors similar to the way equity securities do. The price of bonds in the secondary market depends on all of the following:
- Interest rates
- Coupon rate
- Type of bond
- Supply & demand
- Other features i.e. Callable, convertible
Corporate bonds are always priced, as a percentage of par, and par value for all bonds is always $1,000, unless otherwise stated.
Par value of a bond is equal to the amount that the investor has loaned to the issuer. The terms par value, face value and principal amount are synonymous and are always equal to $1,000. The principal amount is the amount that will be received by the investor at maturity, regardless of the price the investor paid for the bond. An investor who purchases a bond in the secondary market for $1,000 is said to have paid par for the bond.
In the secondary market, many different factors affect the price of the bond. It is not at all unusual for an investor to purchase a bond at a price that is below the bond’s par value. Anytime an investor buys a bond at a price that is below the par value, they are said to be buying the bond at a discount.
Often market conditions will cause the price of existing bonds to rise and make it attractive for the investors to purchase a bond at a price that is greater than its par value. Anytime an investor buys a bond at a price that exceeds its par value, the investor is said to have paid a premium.
Corporate Bond Pricing
All corporate bonds are priced as a percentage of par into fractions of a percent. For example, a quote for a corporate bond reading 95 actually translates into:
95% x $1,000 = $ 950
A quote for a corporate bond of 97 1/4 translates into:
97.25% x $1,000 = $ 972.50