How the Face Value of a Bond Differs From Its Price

Face value is equal to a bond's price when it is first issued, but the price changes after that. · As the bond's price fluctuates, the price is ... Investing Bonds Facevalue,alsoknownastheparvalue,isequaltoabond'spricewhenitisfirstissued.Afterthat,thepriceofthebondfluctuatesinthemarketinaccordancewithchangesininterestrateswhilethefacevalueremainsfixed. KeyTakeaways Facevalueisequaltoabond'spricewhenitisfirstissued,butthepricechangesafterthat.Asthebond'spricefluctuates,thepriceisdescribedrelativetotheoriginalparvalue,orfacevalue;thebondisreferredtoastradingaboveparvalueorbelowparvalue.Threefactorsthatinfluenceabond'scurrentpricearetheissuer'screditrating,marketinterestrates,andthetimetomaturity. BasicTerms Thevarioustermssurroundingbondpricesandyieldscanbeconfusingtotheaverageinvestor.Abondrepresentsaloanmadebyinvestorstotheentityissuingthebond,withthefacevaluebeingtheamountofprincipalthebondissuerborrows.Theprincipalamountoftheloanispaidbackatsomespecifiedfuturedate.Interestpaymentsaremadetotheinvestoratregular,specifiedintervalsduringthetermoftheloan,typicallyeverysixmonths. Abondisafixed-ratesecurityorinvestmentvehicle.Theinterestratetoabondinvestororpurchaserisafixed,statedamount.However,thebond'syield,whichistheinterestamountrelativetothebond'scurrentmarketprice,fluctuateswiththeprice.Asthebond'spricevaries,thepriceisdescribedrelativetotheoriginalparvalue,orfacevalue;thebondisreferredtoastradingaboveparvalueorbelowparvalue. Theneedtochangetheyieldtoreflectcurrentmarketconditionsdrivesthechangesinprice.Unfavorabledevelopmentsdemandhigheryields,sobondpricesmustfall.Inthesameway,improvementsinthecompany'ssituationallowittoraisefundsatlowerrates.Hence,thepricesofexistingbondsrise. FactorsThatInfluenceBondPrices Threefactorsthatinfluenceabond'scurrentpricearethecreditratingoftheissuer,marketinterestrates,andthetimetomaturity.Asthebondnearsitsmaturitydate,thebondpricenaturallytendstomoveclosertoparvalue. Thecreditratingforabondisdeterminedbybondratingcompanies,suchasMoody'sorStandard&Poor's.Lowerratingsgenerallycauseabond'spricetofallsinceitisnotasattractivetobuyers.Whenthepricedrops,thatactiontendstoincreasethebond'sappealbecauselower-pricedbondsofferhigheryields. Anychangeinpublicperceptionofafirm'screditworthinesscaninfluencethepriceofitsbonds.Inmanycases,bondratingdowngradessimplyconfirmwhatinvestorsalreadysuspected. Prevailingmarketinterestrateschangeafterabondisissued,andbondpricesmustadjusttocompensateinvestors.Ifinterestratesrise,thenbondpricesmustfall.Supposeathree-yearbondpays3%whenitisissued,andthenmarketinterestratesrisebyhalfapercentagepointayearlater.Inordertosellthebondinthesecondarymarket,thepriceofthebondwillhavetofallabout1%(extra0.5%peryearx2years),soitwillbetradingatadiscounttofacevalue.Newbondsfromfirmswithsimilarcreditqualityarenowpaying3.5%.Theold3%bondstillpays3%ininterest,butinvestorscannowlookforwardtoanextra1%whenthebondmatures.Similarly,thepriceofthebondmustriseifinterestratesfall. Timetomaturityalsousuallyinfluencesbondprices.However,theexacteffectdependsontheshapeoftheyieldcurve.Anormalyieldcurvefeatureslowerinterestratesforshort-termbondsandhigherinterestratesforlong-termbonds.Thissituationisconsiderednormalbecauselonger-termbondshavehigherinterestraterisk.Investorswillusuallydemandhigherinterestratesascompensationfortakingthatrisk.However,theyieldcurvemayflattenifthereiswidespreadanticipationthatinterestrateswillremainunchanged.Ifenoughinvestorsbelieveinterestratesaregoingtofall,aninvertedyieldcurvecanoccur. TheBottomLine Themostimportantdifferencebetweenthefacevalueofabondanditspriceisthatthefacevalueisfixed,whilethepricevaries.Whateverpriceissetforfacevalueremainsthesameuntilthebondreachesmaturity.Ontheotherhand,bondpricescanchangedramatically.Intheory,aspectaculardeclineincreditqualitycansendthebondpricetozero.Inactualpractice,securedbondholdersarepaidfirstwhenabusinessisliquidated,sosomefundsareusuallyrecovered.Repeatedinterestratehikescanalsotakeatollonbondprices.Finally,thereissomegoodnewsontimetomaturity.Bondpricesnormallyriseasbondsapproachmaturity. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. U.S.SecuritiesandExchangeCommission."InvestorBulletin:FixedIncomeInvestments—WhenInterestRatesGoUp,PricesofFixed-RateBondsFall."AccessedApril19,2020. Moody'sInvestorsService."Lookuparating."AccessedApril19,2020. S&PGlobal."Ratings."AccessedApril19,2020. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description RelatedArticles Investing HowtoInvestinCorporateBonds Strategy&Education HowBondsPricesAreDetermined FederalReserve InterestRateRiskBetweenLong-TermandShort-TermBonds FixedIncome LearntoCalculateYieldtoMaturityinMSExcel FixedIncome ThePredictivePowersoftheBondYieldCurve CorporateBonds 6BiggestBondRisks PartnerLinks RelatedTerms WhatIsanInvertedYieldCurve? Aninvertedyieldcurveistheinterestrateenvironmentinwhichlong-termdebtinstrumentshavealoweryieldthanshort-termdebtinstruments. more HowtoReadaYieldCurve Ayieldcurveisalinethatplotstheinterestrates,atasetpointintime,ofbondshavingequalcreditqualitybutdifferingmaturitydates. more BondYieldFormulaandCalculation Bondyieldistheamountofreturnaninvestorwillrealizeonabond,calculatedbydividingitsfacevaluebytheamountofinterestitpays. more TreasuryBills(T-Bills) ATreasuryBill(T-Bill)isashort-termdebtobligationissuedbytheU.S.TreasuryandbackedbytheU.S.governmentwithamaturityoflessthanoneyear. more YieldtoMaturity(YTM) Yieldtomaturity(YTM)isthetotalreturnexpectedonabondifthebondishelduntilmaturity. more WhatIsaBond? Abondisafixed-incomeinvestmentthatrepresentsaloanmadebyaninvestortoaborrower,ususallycorporateorgovernmental. more