Above par

Above par refers to a situation where a bond or other financial instrument is trading at a price higher than its face or nominal value.
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Updated: May 24, 2024

3 key takeaways

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  • Above par means a bond or financial instrument is priced higher than its face value.
  • This often occurs when the instrument offers a higher interest rate than the current market rates.
  • It indicates investor confidence and demand for the security.

What is above par?

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When a bond or other financial instrument is said to be trading above par, it means that its market price is higher than its nominal or face value. The face value, also known as par value, is the amount paid to the holder at maturity. For example, if a bond has a face value of $1,000 but is currently trading at $1,050, it is trading above par.

Bonds typically trade above par when they offer a higher interest rate, or coupon rate, than the prevailing market interest rates. Investors are willing to pay a premium for these bonds because they provide better returns compared to newly issued bonds at current lower rates.

Reasons for a bond trading above par

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Several factors can cause a bond to trade above par:

  • Higher coupon rates: Bonds with interest rates higher than current market rates are more attractive to investors, leading to higher demand and prices.
  • Credit quality: Bonds issued by entities with high credit ratings or improved creditworthiness can trade above par due to perceived lower risk.
  • Market conditions: Favorable economic conditions and investor sentiment can drive up the demand and price for certain bonds, pushing them above par.

Implications of a bond trading above par

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When a bond trades above par, it has several implications for both issuers and investors:

  • For investors: Buying a bond above par means they are paying more than the face value, which can impact their overall return. The yield to maturity (YTM) on the bond will be lower than the coupon rate because the investor paid a premium.
  • For issuers: Issuers might see higher demand for their bonds, which can be beneficial for raising capital. However, if they plan to buy back the bonds, they might have to pay more than the face value.

Examples of above par scenarios

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  • Corporate bonds: A corporation issues bonds with a 5% coupon rate when market rates are 3%. These bonds may trade above par due to their higher interest payments.
  • Municipal bonds: A city issues bonds to fund infrastructure with a 4% interest rate. If market rates drop to 2%, these bonds become more valuable and trade above par.
  • Government bonds: U.S. Treasury bonds with a high coupon rate compared to new issues can trade above par as investors seek better returns.

Managing investments above par

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Investors considering bonds trading above par should evaluate:

  • Yield to maturity: Calculate the YTM to understand the actual return if the bond is held to maturity, considering the premium paid.
  • Interest rate trends: Monitor interest rate movements, as rising rates can cause bond prices to fall, potentially leading to capital losses if sold before maturity.
  • Credit risk: Assess the issuer’s creditworthiness, as changes in credit ratings can impact bond prices.

Understanding the concept of above par helps investors make informed decisions about buying and selling bonds in the secondary market. It also aids in assessing the attractiveness of different bonds based on their interest rates and market conditions. To further explore related topics, you might want to learn about bond pricing, yield to maturity, and the impact of interest rate changes on bond investments.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.