What is 'Above Par'

Above par is a term used to describe the price of a bond when it is trading above its face value. A bond usually trades at above par when its income distributions are higher than those of other bonds currently available in the market. This occurs when interest rates have declined so that newly-issued bonds carry lower coupon rates.

BREAKING DOWN 'Above Par'

There is an inverse relationship between bond yields and prices. When yields drop due to declining interest rates in the economy, bond prices increase. Conversely, when interest rates rise, bond prices will decline, assuming no negative convexity. The basic reason for the inverse relationship is that an existing yield of a bond must match the yield of a new bond issued in a market with higher or lower prevailing interest rates. Suppose a bond is issued at par value of $1,000 carrying a coupon rate of 5%. Six months later, due to a slowdown in the economy, interest rates are lower. The bond will trade above par because of the inverse relationship between yield and price. An investor who buys a bond trading above par receives higher interest payments because the coupon rate was set in a market of higher prevailing interest rates. If the bond is taxable, the investor may elect to amortize the bond premium to offset taxable interest income; if the bond produces tax-exempt interest, the investor must amortize the premium in accordance with IRS rules.

How Far Above Par?

The movement above par for a noncallable bond depends on the bond's duration. The greater the duration, the greater the sensitivity to changes in interest rates. For example, a bond with a duration of 8 years will increase approximately 8% in price if yields drop by 100 basis points, or 1%. For a callable bond, however, the increase in price above par is limited because the bond will very likely be redeemed by the issuer when interest rates fall. That issuer would call away those old bonds and reissue new bonds with lower coupons.

RELATED TERMS
  1. Below Par

    Below par is a term describing a bond whose market price is below ...
  2. Par Value

    Par value is the face value of a bond, or for a share, the stock ...
  3. Premium Bond

    A premium bond is a bond that is trading above its par value. ...
  4. Discount Bond

    A discount bond is a bond that is issued for less than its par ...
  5. Bond

    A bond is a fixed income investment in which an investor loans ...
  6. Deep-Discount Bond

    A deep-discount bond is a bond that sells at a significant lesser ...
Related Articles
  1. Investing

    Investing in Bonds: 5 Mistakes to Avoid in Today's Market

    Investors need to understand the five mistakes involving interest rate risk, credit risk, complex bonds, markups and inflation to avoid in the bond market.
  2. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  3. Managing Wealth

    How Bond Prices and Yields Work

    Understanding bond prices and yields can help any investor in any market.
  4. Investing

    6 Ways That Investors Use Bonds

    Learn how the stodgy stereotype of bonds can overshadow the basic and advanced uses of what these investments can do for your portfolio.
  5. Investing

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  6. Investing

    Corporate Bond Basics: Learn to Invest

    Understand the basics of corporate bonds to increase your chances of positive returns.
  7. Investing

    How Rising Interest Rates and Inflation Affect Bonds

    Understand bonds better with these four basic factors.
  8. Investing

    Why Companies Issue Bonds

    When companies need to raise money, issuing bonds is one way to do it. A bond functions as a loan between an investor and a corporation.
  9. Investing

    How Rising Interest Rates Impact Bond Portfolios

    A look at the impact that changing interest rates - rising or falling - have on bonds and what investors need to consider.
RELATED FAQS
  1. Current yield vs yield to maturity

    Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >>
  2. How a bond's face value differs from its price

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ... Read Answer >>
Trading Center