There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value. Other types of tradeable bonds are sold on the secondary market, and their valuations depend on the relationship between yields and interest rates, among other factors.
All bonds are redeemed at face value when they reach maturity unless there is a default by the issuer. Many bonds pay interest to the bondholder at specific intervals between the date of purchase and the date of maturity. However, certain bonds do not provide the owner with periodic interest payments. Instead, these bonds are sold at a discount to their face values, and they become more and more valuable until they reach maturity.
Not all bondholders hold onto their bonds until maturity. In the secondary market, bond prices can fluctuate dramatically. Bonds compete with all other interest-bearing investments. The market price of a bond is influenced by investor demand, the timing of interest payments, the quality of the bond issuer, and any differences between the bond's current yield and other returns in the market.
An Example of Fluctuating Bond Price
For instance, consider a $1,000 bond that has a 5% coupon. Its current yield is 5%, or $50 / $1000. If the market interest rate paid on other comparable investments is 6%, no one is going to purchase the bond at $1,000 and earn a lower return for their money. The price of the bond then drops on the open market. Given a 6% market interest rate, the bond ends up being priced at $833.33. The coupon is still $50, but the yield for the bond is 6% ($50 / $833.33).
FAQs
The price for a bond or a note may be the face value (also called par value) or may be more or less than the face value. The price depends on the yield to maturity and the interest rate. The "yield to maturity" is the annual rate of return on the security.
Can bonds be worth less than face value? ›
There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value.
What happens if a bond sells for less than face value? ›
The amount a bond sells for below face value is a discount. A difference between face value and issue price exists whenever the market rate of interest for similar bonds differs from the contract rate of interest on the bonds.
When the current price of a bond is less than its face value? ›
Similarly, if the market price is $1010, the bond is trading at a price of 101. When the bond price is higher than its face value, it's described as trading at a premium to par. On the other hand, when the bond price is lower than its face value, it is said to be trading at a discount to par.
Why are bonds sold below face value? ›
Below par refers to a bond price that is currently below its face value. Below par bonds are said to be trading at a discount, and the price will be quoted below 100. Bonds trade below par as interest rates rise, as the issuer's credit rating falls, or when the bond's supply greatly exceeds demand.
How much is a $100 EE bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.
Why would a bond sell at a different price than the face amount? ›
Similar to stocks, bond and CD prices can be higher or lower than the face value of the security because of the current economic environment and the financial health of the issuer.
What is it called when you sell a bond above its face value? ›
A premium bond is a bond trading above its face value, or in other words; it costs more than the face amount on the bond. A bond might trade at a premium because its interest rate is higher than current rates in the market.
How do you know if a bond is undervalued? ›
Valuation of bonds is done to get a fair value of a particular bond. It is calculated by adding up the present value of each year's interest payment and maturity amount till maturity. It helps in determining whether the bond is overvalued or undervalued.
Certain series (such as I bonds) offer a combination of both. Paper bonds continue to earn interest beyond their face value (amount printed on the bond) until they reach final maturity, which is normally 30 years. Older paper bonds can be worth several times more than their face value.
What is the difference between bond price and face value? ›
Face value is the amount of money promised to the bondholder upon the bond's maturity. By contrast, a bond's market value is how much someone will pay for the bond on the free market. Face value is predetermined when the bond is sold; market value takes into account multiple outside factors.
What does face value mean in bonds? ›
The face value of a bond is the price that the issuer pays at the time of maturity, also referred to as “par value.” By comparison, the face value of a stock is the price set by the issuer when the stock is first issued.
What does below face value mean? ›
This is used to indicate when a bond is selling at a discount (below face value), or a premium (above face value), so investors can reduce risks when buying or selling. Face value is important when making bond calculations, such as interest payments, market values, discounts and premiums.
Should you buy bonds when interest rates are high? ›
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
How much does a $1000 T bill cost? ›
To calculate the price, take 180 days and multiply by 1.5 to get 270. Then, divide by 360 to get 0.75, and subtract 100 minus 0.75. The answer is 99.25. Because you're buying a $1,000 Treasury bill instead of one for $100, multiply 99.25 by 10 to get the final price of $992.50.
Why is bond price higher than face value? ›
A premium bond is a bond trading above its face value or costs more than the face amount on the bond. A bond might trade at a premium because its interest rate is higher than the current market interest rates.
Are bonds always issued at face value? ›
The par value also helps in the determination of coupon payments by the dollar value. Bonds are not always issued at their par value because they can be issued with either a premium or a discount. This varies based on the interest rates that tend to increase or decrease with what's happening in the economy as a whole.
