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“At par” is a financial term that describes the price level of a bond. A bond that is sold at par is sold for its face value. Bond pricing gives information about investors’ expectations of market interest rates. Which bonds sell at par, at a premium and at a discount reveal the market’s predictions of interest rates.
A bond, also commonly called a note, is a promise to pay a certain amount of money to the bond holder after a designated time. The issuing entity pays the holder a fixed amount of interest each period throughout the life of the bond. At the end of the life of the bond, the holder receives an amount specified in the bond; this is typically $1,000 US Dollars (USD) for bonds issued in the United States. Bonds are issued by corporations and governments, and the value of the bond depends in part on the credibility of the agency that issued it.
The face value of a bond is the amount paid at the end of the bond’s life. It is also called the par value of the bond. The interest payments the holder receives are called bond coupons, and they are described by the interest rate that they represent.
For example, a bond might have a 7 percent coupon. If it is a $1,000 USD bond with semiannual coupons, then the holder receives 3.5 percent, or $350 USD, every six months. The price of a bond is the present value of the payment stream that the bond promises, with adjustments for default risk and other uncertainties.
Bonds are divided into classes based on their price levels. A bond priced above its face value sells “at a premium,” and it is called a premium bond. If the price of a bond is lower than its face value, then it is a discount bond. Bonds that are sold at a price that is equal to their face value are sold “at par.”
The price of the bond depends on the present value of the face value and the coupon payments. If the bond sells at par, then the interest rate that is promised by the bond is equal to the market’s expectations of the real world interest rate. Thus, the investor is indifferent between having $1,000 USD today and having $1,000 USD in the future plus the interest payments. Premium bonds have interest rates that are higher than the predicted market rate, while the interest rate of discount bonds is lower.