Principal, also known as par value or face value in the bond market, is the amount of money the issuer will return to bondholders at maturity. The principal is separate from the interest payments (known as coupon payments) the bond issuer makes to the bondholder. The value of a bond investment can and will deviate from par value as interest rates change. This means the current value of a bond will not always match its original face value.
For example, if you buy a bond that pays 3% interest, but interest rates on comparable bonds rise to 4%, the value of your bond will fall below its face value. Bond traders call this a discount to par value. If interest rates fall to 2%, your 3% bond will trade at a premium to par value. If you hold your bond to maturity, regardless of whether your bond trades at a discount or premium, you’ll continue to receive your 3% coupon payments, and you’ll receive the principal at maturity.
To learn more about principal, maturity, coupons, and other bond terms, visit Britannica Money’s bond market basics entry.
