# How The Face Value Of A Bond Differs From Its Price

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Thus, at the time of buying the bond, the buyer has to pay the seller the bond’s market price plus the portion of the next interest payment that legally belongs to the seller. In this example, an interest amount representing two of the six months needs to be paid. The price of a bond fluctuates with the market rate over time.Assume that Clinton Company issues a bond to the public worth \$10M. Each one of the 10,000 bonds issued has a \$1,000 par value. When each bond matures at a specified date, the company will pay back the value of \$1,000 per bond to the lender.The principal is a single repayment to the investor at maturity. The variables in the formula require you to use the interest payment amount, the discount rate and the number of years remaining until maturity. The sooner you are able to receive any payment, the more valuable it is to you.

## Interest Payments On The Bond

Also called the par value or denomination of the bond, the bond face value is the principal amount of the debt. It is what the investor lent to the bond-issuing corporation. The amount, usually a multiple of \$100, is found in small denominations up to \$10,000 for individual investors and larger denominations up to \$50,000 or more for corporate investors. Input the variables and calculate the present value of the principal payments. The present value of the interest payments was an annuity, or a string of payments.It’s one of the key numbers you need to know about a bond in order to understand its value as an investment. The need to change the yield to reflect current market conditions drives the changes in price. Unfavorable developments demand higher yields, so bond prices must fall. In the same way, improvements in the company’s situation allow it to raise funds at lower rates. The interest rate to a bond investor or purchaser is a fixed, stated amount.Aside from knowing your bond’s face value, be sure you’re well-versed in its coupon dates. These are the all-important days when you’ll receive interest payments.Investors will usually demand higher interest rates as compensation for taking that risk. However, the yield curve may flatten if there is widespread anticipation that interest rates will remain unchanged. If enough investors believe interest rates are going to fall, an inverted yield curve can occur. When the bond matures, the business must record the repayment of the principal to the bondholder, as well as all final interest payments. At this time, the discount on bond payable and bond payable accounts must be zeroed out, and all cash payments must be recorded.First, it must record any final interest payments that are made. This is done by debiting the bond payable account and crediting the cash account for the full book value of the bond. To record a bond issued at par value, credit the “bond payable” liability account for the total face value of the bonds and debit cash for the same amount.

## What Is Par Value Of A Bond?

To find out what the \$100 payment is worth today, you would compute the present value of \$100. An interest rate refers to the amount charged by a lender to a borrower for any form of debt given, generally expressed as a percentage of the principal. If you have specific questions about investing in bonds, consider consulting with a financial advisor. Face value is the nominal value or dollar value of a security stated by the issuer, also known as “par value” or simply “par.” Yield to maturity is the total return expected on a bond if the bond is held until maturity.

## What is GREY market IPO?

An IPO grey market is one where a company’s shares are bid and offered by traders unofficially. This takes place before the shares are even issued by the company in an Initial Public Offering (IPO). Since this is an unofficial market, there are no rules and regulations.While the business may not make periodic interest payments, interest income is still generated. The interest income is merely accumulated and paid at the end of the bond’s term. As the company pays interest, the discount on the bond payable is amortized. Generally, the amortization rate is calculated by dividing the discount by the number of periods the company has to pay interest. When the company makes an interest payment, it must credit, or decrease, its cash balance by the amount it paid in interest. To balance the entry, the company must record a debit equal to the amount it paid in its bond interest expense account. Harvey acquired the bond for a market price of \$58,732.61 and sold the bond approximately 12.5 years later for \$112,274.03 because of the very low market rates in the bond market.

## Bond Market Rate

However, the bond’s yield, which is the interest amount relative to the bond’s current market price, fluctuates with the price. As the bond’s price varies, the price is described relative to the original par value, or face value; the bond is referred to as trading above par value or below par value. The face value of bonds usually represents the principal or redemption value. Interest payments are expressed as a percentage of face value. Before maturity, the actual value of a bond may be greater or less than face value, depending on the interest rate payable and the perceived risk of default. As bonds approach maturity, actual value approaches face value.

Since there is no accrued interest, the cash price is the same as the date price. You use a discount rate to discount that single payment into a value today. Assume that you decide on a 4% discount rate for the \$100 payment due in 5 years. The discount rate is used to discount the value of your future payments into today’s dollars. In this case, you’re calculating the present value of a single sum of money. One of the main benefits of using a financial advisor is that they can help you build a diversified portfolio. In simple terms, a bond is a loan between an investor and an issuer.