How to Calculate the Par Value of a Bond
Bonds are actually quite similar to the certificates of deposit which banks offer as a way to earn money on savings. But they are not issued by banks, rather they are managed by the local, state and other government organizations or some other financial firms and they can be traded in the finance market just like stocks. Unlike stocks though, bonds have a fixed annual rate of return and you cannot full reward for it till the term ends.
Instructions
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1
Before investing money into bonds you should have a know-how of bonds cycles, their par value, and their value calculation after a certain time into the bond cycle. Par value is not only a parameter to gauge the current value of bond, it also looks after earning potential and risks involved with it.
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2
Bonds are issued for different amounts. The most common type of bonds in use is the $ 1000 bond but they can be of any amount. Treasury bonds are the highest one of them all and their par values are around the $ 10000 mark, where as the municipal bonds have a face value of around $ 500.
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3
Par value is the value of the bond upon reaching maturity that is the amount of money that the debtor will have to pay to redeem the bond. All bonds pay a specific amount of interest based on its par value. If a bond has a par value of 1000 dollars and an interest rate of 10 percent, it means that the bond will generate 100 dollars in interest each year.
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4
Coupon rate is the most important factor in the calculation of the worth of bonds. If the coupon rate is higher than the interest rates prevailing in the market, the price of bond will be more than its par value. However, if it is lower than the market interest rates, the price of bond will be lower than the par value. In the later case you may buy the bond at a ‘discount’ rate.
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5
You also need to know the exact day when the bond will mature. Bonds can be issued for the period of one year to the period of 30 to 40 years.
