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.
Can bond price be less than face value? ›
The price at which the bonds are traded in the market may not match their face value. They may trade at a value above or below their 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.
Why would a bond sell at a different price than the face amount? ›
An investor might pay more than face value for a bond if the interest rate/yield they will receive on the bond is higher than the current rates offered in the bond market. In essence, the investor is paying more to receive higher returns.
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 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.
Why is my $100 savings bond only worth $50? ›
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.
How long until a bond is worth face value? ›
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.
Does the price of a bond always match its face value? ›
The actual market value of a stock or a bond is not reliably indicated by its face value because many other influencing forces, such as supply and demand, are at play.
For example, if interest rates have risen since the bond was purchased, the bondholder may have to sell at a discount—below par.
When the price of the bond is below the 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.
When to sell a bond? ›
- Interest Rates Are Set to Rise. The most significant sell signal in the bond market is an indication that interest rates are about to rise significantly. ...
- The Issuing Entity Seems Unstable. ...
- The Market Price Is Unusually High.
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.
What is it called when you sell a bond above its 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.
When bond is bought at a price below face value? ›
A discount bond is a security that is issued for less than its par or face value. A discount bond may also be a bond that trades for less than its face value in the secondary market. A bond is considered a deep-discount bond if it is sold at a significantly lower price than par value, usually at 20% or more.
Are all bonds face value 100? ›
You might also see bonds with face values of $100, $5,000 and $10,000. The price you pay for a bond may be different from its face value and will change over the life of the bond, depending on factors like the bond's time to maturity and the interest rate environment. But the face value does not change.
