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 bond price be 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.
When a bond is issued for a price less than its face value? ›
A discount bond is a bond that is issued at a lower price than its par value or a bond that is trading in the secondary market at a price that is below the par value. It is similar to a zero-coupon bond, only that the latter does not pay interest until maturity.
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.
Why would a bond sell at a different price than the face amount? ›
As shown above, if the market rate is lower than the contract rate, the bonds will sell for more than their face value. Thus, if the market rate is 10% and the contract rate is 12%, the bonds will sell at a premium as the result of investors bidding up their price.
Can a bond be worth less than face value? ›
Bonds and Notes
The interest rate for a particular security is set at the auction. 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.
Why do some bonds sell below face value? ›
Similar to stocks, bonds 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. Price is important when you intend to trade bonds with other investors.
Does the price of a bond always match its face value? ›
The Bottom Line
The most important difference between the face value of a bond and its price is that the face value is fixed, while the price varies due to outside influences. The amount set for face value remains the same until the bond reaches maturity.
What do you call a bond whose price is below its face value and the face value is paid at the maturity date? ›
Discount bonds are fixed-income securities that are issued at a lower price than their face value. Since they come at a discount (sometimes very deep discounts), they promise a high return. Put simply, you pay a lower price for the bond but may still get the full face value when the bond matures.
What are bonds that sell at less than face value? ›
Investors may be willing to pay a premium for bonds with higher coupon rates, as they offer higher yields than current market rates. So, to summarize, bonds that sell at less than face value are priced at a discount, while bonds that sell at greater than face value are priced at a premium.
You are guaranteed that your bond will be worth at least face value at 17 years. If the interest rates have been too low for your bond to accrue enough interest to be worth face value at 17 years, Treasury will make a one-time adjustment to increase the redemption value to face value at that time.
When a bond is purchased at a price below the face value? ›
If a bond's price is below face value, it is sold at a discount. It's important to understand that not all bonds are created equal. While all bonds are considered debt instruments, they are created by different entities for very differ ent purposes and carry varying risks and tax- related liabilities.
When a bond issue sells for less than its face value, the market rate of interest is? ›
If a bond is trading lower than its par value, then the market interest rate is higher than the interest rate stated on the bond.
When bonds are sold for less than the face amount? ›
Bonds sell for less than their face value when they're sold at a discount. This typically happens when the bond's interest rate is lower than the current market interest rate.
When a bond is worth more than its face value it is said to sell? ›
For example, a bond with a par value of $1,000 is selling at a premium when it can be bought for more than $1,000. Alternatively, a bond selling for less than $1,000 is discounted. A bond could also be discounted because its coupon rate is lower than the current market interest rates.
Can you buy bonds for less than face value? ›
Most bonds are either sold at a discount or a premium to its face value. Except for savings bonds, the market will ultimately determine the selling price. Discount bonds sell for less than face value or par value. A premium bond's selling price usually exceeds its par value.
When the price of a bond is above the face value? ›
Above par refers to a bond price that is currently greater than its face value. Above par bonds are said to be trading at a premium and the price will be quoted above 100. Bonds trade above par as interest rates decline, as the issuer's credit rating increases, or when the bond's demand greatly exceeds supply.
