There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value. Other types of tradeable bonds are sold on the secondary market, and their valuations depend on the relationship between yields and interest rates, among other factors.
All bonds are redeemed at face value when they reach maturity unless there is a default by the issuer. Many bonds pay interest to the bondholder at specific intervals between the date of purchase and the date of maturity. However, certain bonds do not provide the owner with periodic interest payments. Instead, these bonds are sold at a discount to their face values, and they become more and more valuable until they reach maturity.
Not all bondholders hold onto their bonds until maturity. In the secondary market, bond prices can fluctuate dramatically. Bonds compete with all other interest-bearing investments. The market price of a bond is influenced by investor demand, the timing of interest payments, the quality of the bond issuer, and any differences between the bond's current yield and other returns in the market.
An Example of Fluctuating Bond Price
For instance, consider a $1,000 bond that has a 5% coupon. Its current yield is 5%, or $50 / $1000. If the market interest rate paid on other comparable investments is 6%, no one is going to purchase the bond at $1,000 and earn a lower return for their money. The price of the bond then drops on the open market. Given a 6% market interest rate, the bond ends up being priced at $833.33. The coupon is still $50, but the yield for the bond is 6% ($50 / $833.33).
FAQs
The price of a bond can fluctuate in the market by changes in interest rates while the face value remains fixed. Some bonds, like zero-coupon bonds, are issued at a discount to par value so the price is lower than the par value at issue.
Why is my bond worth less than face value? ›
The price for a bond or a note may be the face value (also called par value) or may be more or less than the face value. The price depends on the yield to maturity and the interest rate. The "yield to maturity" is the annual rate of return on the security.
Can bond price be less than face value? ›
There are two primary reasons a bond might be worth less than its listed face value. A savings bond, for example, is sold at a discount to its face value and steadily appreciates in price as the bond approaches its maturity date. Upon maturity, the bond is redeemed for the full face value.
When a bond is issued for a price less than its face value? ›
A discount bond is a bond that is issued at a lower price than its par value or a bond that is trading in the secondary market at a price that is below the par value. It is similar to a zero-coupon bond, only that the latter does not pay interest until maturity.
Why would a bond sell at a different price than the face amount? ›
Similar to stocks, bond and CD prices can be higher or lower than the face value of the security because of the current economic environment and the financial health of the issuer.
What happens if a bond sells for less than face value? ›
The amount a bond sells for below face value is a discount. A difference between face value and issue price exists whenever the market rate of interest for similar bonds differs from the contract rate of interest on the bonds.
How long until a bond is worth face value? ›
You are guaranteed that your bond will be worth at least face value at 17 years. If the interest rates have been too low for your bond to accrue enough interest to be worth face value at 17 years, Treasury will make a one-time adjustment to increase the redemption value to face value at that time.
Why is my Patriot bond worth less? ›
The value of a Patriot Bond depends on its face value and its date of issuance. Every Patriot Bond earns interest, which accrues in six-month periods. After 20 years, the Patriot Bond is guaranteed to be worth at least face value.
How much is a $100 savings bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
May 7, 2024
The price of a bond can fluctuate in the market by changes in interest rates while the face value remains fixed. Some bonds, like zero-coupon bonds, are issued at a discount to par value so the price is lower than the par value at issue.
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.
What are bonds that sell at less than face value? ›
Bonds that trade at a value of less than face value would be considered a discount bond. For example, a bond with a $1,000 face value that's currently selling for $95 would be a discounted bond.
When a bond issue sells for less than its face value the market rate of interest is? ›
Answer and Explanation:
If a bond is trading lower than its par value, then the market interest rate is higher than the interest rate stated on the bond.
When bond is bought at a price below face value? ›
Bond discount is the amount by which the market price of a bond is lower than its principal amount due at maturity. A bond issued at a discount has its market price below the face value, creating a capital appreciation upon maturity since the higher face value is paid when the bond matures.
What is it called when you sell a bond above its face value? ›
A premium bond is a bond trading above its face value, or in other words; it costs more than the face amount on the bond. A bond might trade at a premium because its interest rate is higher than current rates in the market.
What is the difference between face value and issue price? ›
The face value can be any value like INR 2, INR 10, or INR 1000. The issue price, also called price band, is the stock's face value plus the premium that a company demands to charge from its investors. In simpler words, The issue price of the share = Face Value of the share + Premium asked by the company on the share.
How much is a $100 EE bond worth after 30 years? ›
How to get the most value from your savings bonds
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
May 7, 2024
If prevailing interest rates increase above the bond's coupon rate, the bond becomes less attractive. In this situation, the bond price drops to compensate for the less attractive yield.
