What is a Par Bond?

A par bond is a bond that sells at its exact face value. This typically means that a bond sells for $1,000, since this is the face value of most bonds. A par bond will have a yield to the investor that matches the coupon amount attached to the bond.

It is extremely unusually for a bond to trade at its exact face value, since the current market interest rate is always varying, either above or below the interest rate implied by the coupon amount of a bond. If the market rate is above a bond’s coupon rate, then investors will bid the bond price down below its face value, in order to earn an effective interest rate that matches the market rate. Or, if the market rate is below the coupon amount, then investors will do the reverse and bid up the bond’s price in order to earn an effective rate that matches the market rate.

Example of a Par Bond

As an example of the differences between market rates and the face value of a bond, ABC International sells bonds having a 6% coupon rate. However, the market interest rate at the time of the bond sale is 7%. Consequently, investors will pay less than the face value of the bond in order to achieve the effective 7% interest rate that they want. If the market interest rate subsequently declines to 4%, then the coupon rate on the bond will look more attractive, and investors will bid up the price of the bond. Thus, a par bond situation is only likely to arise during those brief moments when the market interest rate is exactly aligned with the coupon rate.