What Is Below Par?
Below par is a term describing a bond whose market price is trading below its face value or principal value, usually $1,000. Bonds are debt instruments that are usually issued by corporations and governments to raise money. When an investor purchases a bond, the price paid for it is called the face value. If the bond is selling for below par, its price is selling for less than its face value. As bond prices are quoted as a percentage of face value, a price below par would typically be anything less than 100.
Key Takeaways
- 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.
Understanding Below Par
A bond can be traded at par, above par, or below par. A bond trading at par means the bond is trading at the bond certificate's face value. An investor who purchases this bond will be repaid the par value at maturity and may periodically receive interest payments over the life of the bond. In other words, the maturity date of the bond is when the principal or original amount that was invested is returned to the investor.
A bond with a price above par is called a premium bond. However, the bond value will slowly decrease over the life of the bond until it is at par on the maturity date. The bondholder will receive the par value of the bond when it matures, which is less than what the bond was purchased for by the investor.
A bond trading below par means the bond is trading at a discount. As the discount bond approaches maturity, its value increases and slowly converges towards par over its life. At maturity, the bondholder receives the par value of the bond, which is a higher value than what the bond was purchased for by the investor.
If a bond, for example, has a $1,000 face value printed on its certificate but is selling in the market for $920, it is said to be trading below par. Although the investor paid $920 to acquire the bond, $1,000 will be paid to the investor when it matures.
Why Bonds Trade Below Par
A bond can trade at below par for a few reasons, which can include market conditions and changes in the company or entity that has issued the bond.
Change in Interest Rates
A bond may trade below par when interest rates change in the market. There is an inverse relationship that exists between bond prices and interest rates. If prevailing interest rates rise in the economy, the value or price of a bond will decrease. This is because the coupon rate—which is a fixed interest rate—on the bond is now lower than the market interest rate. As a result, market participants will typically sell their existing fixed-rate bonds in a rising-rate environment and opt for newly-issued bonds at the current, higher coupon rates.
For example, let’s assume a bond was issued at par. The coupon rate on the bond is 3.5%, and the market interest rate is also 3.5%. A few months later, forces within the economy push interest rates higher, and comparable bonds now offer a 4.0% rate. Since the coupon rate on the existing bond is fixed at 3.5%, it is now lower than the interest rate that could be earned by buying a new bond. When a bond trades below par, its current yield (coupon payment divided by market price) is higher than its fixed coupon rate.
Change in Credit Rating
A bond may also trade below par if its credit rating is downgraded. A rating agency measures a bond issuer's creditworthiness by examining the financial performance and stability of the issuer. A credit agency, such as Moody's Corporation (MCO), might downgrade an issuer’s credit after taking certain factors into consideration, including concerns about the issuer’s risk of default—or nonpayment of the principal back to the investors. Other factors that could lead to a credit downgrade might include deteriorating business conditions, weaker economic growth, and excessive amounts of debt on a company's balance sheet. A downgrade would reduce the confidence level in the issuer’s financial health, which would likely cause the value of the bonds to drop below par.
Supply and Demand
When there is an excess supply of a bond, the bond will trade below par. If interest rates are expected to increase in the future, the bond market may experience an increase in the number of new bonds being issued. Since bond issuers attempt to borrow funds from investors at the lowest cost of financing possible, they will increase the supply of these low interest-bearing bonds, knowing that bonds issued in the future may be financed at a higher interest rate. The excess supply will, in turn, push down the price for bonds below par.
FAQs
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.
What is below par example? ›
Not up to the average, normal, or desired standard. For example, I am feeling below par today, but I'm sure I'll recover by tomorrow . This term employs par in the sense of “an average amount or quality,” a usage dating from the late 1700s.
What does low par mean? ›
: worse than expected : not very good. Our meal was below par. I'm feeling a little below par.
What is the meaning of below par and above par? ›
GLOSSARY LETTER. "At par" / "Above par" / "Below par" is when the Market price at which a Financial security trades is respectively equivalent to / above / below this Security Nominal value.
Why does pull to par happen? ›
Pull to par is the movement of a bond's price toward its face value as it approaches its maturity date. Premium bonds, which trade at a higher price than their face (par) value, will decrease in price as they approach maturity.
What does it mean to work below par? ›
phrase. If you say that someone or something is below par or under par, you are disappointed in them because they are below the standard you expected. Duffy's primitive guitar playing is well below par. ... a below par effort.
What is the issue below par? ›
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.
What is a word for below par? ›
Synonyms of below par
falling short of a standard They hired their child a tutor after learning that his performance in language arts was below par. bad. poor. inferior. unacceptable.
What is below par level? ›
The PAR level is the amount of an inventory item needed to meet the demand of customers while cushioning against unexpected demand. When inventory drops below the calculated PAR level, an order should be placed to restock the item back to that level.
Is it better to be under par? ›
A very good golfer — or a very lucky golfer — might complete a hole in fewer strokes than the par (called "under par"). And of course, most of us are not "experts" at golf, and so on most holes we'll need more strokes than the par (called "over par").
A bond that is offered at a dollar price higher than par (100) is said to be priced at a premium. Bonds offered at a dollar price less than par are said to be priced at a discount. Premium bonds are purchased at a price higher than their terminal value.
Why do people say above par? ›
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.
Is it below par or subpar? ›
In golf, subpar means a golfer had to hit the ball more times than expected to get it in the hole. Subpar is from sub-, or "under" and par, or "average," from a Latin root meaning "equality." Definitions of subpar. adjective. (golf) having a score below par, for each hole or the entire course.
What is the price at par? ›
The term “at par” means “at face value.” Bonds, preferred stocks, or other debt securities can be traded at par or at face value, below par, or above par. Par values are normally constant, as opposed to market prices, which fluctuate with consumer demand and interest rate movements.
What does par value mean? ›
Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate, as stated in the corporate charter. The face value of the stock stated in the corporate charter is often unrelated to the actual value of its shares trading on the open market.
What is roll down and pull to par? ›
Pull-to-par says nothing about the shape of the yield curve. Rolldown is all about the shape of the yield curve. If the yield curve is upward sloping, you "roll down" the yield curve (i.e., yield goes down) as time passes, resulting in capital gains.
What is an example of at par? ›
Examples from Collins dictionaries
The serial bonds are priced at par to yield from 6.30 percent in 2002 to 7 percent in 2012. The bank holding company said the notes will be redeemed at par plus accrued interest. If a bond or stock is priced at par, it is trading at its face value.
What is an example of on a par with? ›
As good as, equal to, as in This violinist may be an amateur but he's on a par with professional orchestral players . The noun par has meant “that which is equal” since the mid-1600s; the idiom here was first recorded in 1832.
What is an example of a par value? ›
A bond's par value is the face value of the bond plus coupon payments, annually or sem-annually, owed to the bondholders by the issuer of the debt. A bond with a par value of $1,000 and a coupon rate of 4% will have annual interest payments of 4% x $1,000 = $40.
What is 1 below par called? ›
A birdie is a score of one under par. Some examples of a birdie include scoring a two on a par-3 hole, a three on a par-4 hole, and a four on a par-5 hole.
