Par value / market Price of Bond?

Question

May I know is it that the Par value/ Face value of bond always @ 1000? would it be possible in other amount such as 1042, 1142?

How about Market price? would it be equal to Face Value?

Answer 1

A Bond is simply an IOU issued by a Company (or Bank, or Government).

It has a Value, a Rate of Interest (on that value) and (usually) a Redemption date. These are set when it is issued.

In theory each Bond could be any amount, however Bonds are usually Traded on the Stock Exchange in set amounts. So it makes a lot of sense to issue Bonds in the amount the Stock Exchange trades on :-)

Market Price is NEVER equal to Face Value EXCEPT when it is out of time (i.e. Redemption date is reached).

It works like this - say I offer you a Bond value £1,000 rate of Interest 5% redemption date 2010...

How much would you pay for it ? Did you say £1000 ???

That's really generous - I might be Bankrupt before the end of this year (and never have to pay the Interest) - or I might be Bankrupt before 2010 (& never have to pay back the 'principle' (the £1000 face value)).


Plainly the higher my Credit Rating, the more likely I will pay the Interest when it is due and pay whole £1,000 back when that is due too.

OK - say I sold you the Bond for £900 & you decide you want the cash back early. So you offer it for sale to the next person - but in the meanwhile Interest Rates have gone up to 8% ... so first I am more likely to go bust & second I'm only paying 5% on the Bond (not a good deal) - so chances are you will only get (say) £700 for it ..

But what if Interst rates drop to 2% ? Well I still have to pay you 5% on the Bond - but I am a less likely to go bust .(since the cost of my other borrowings will have gone down) ... so the Bond may now be worth £1001 !

The day before the Bond is due to be Redeemed, it will be worth £1000 (assuming you believe I can actully pay out tomorrow :-) )

Answer 2

The market value depends on the interest rate. Bond prices move inverse to interest rates. If interest rates rise, bonds go down and vice versa.