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.
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.
When bonds are sold for less than the face amount? ›
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.
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.
Why is my savings bond worth so little? ›
If a bond is held past its maturity, the federal government remains responsible for the debt. However, savings bonds that are held past their maturity date do not continue to earn interest and may actually lose value due to inflation.
Can a bond ever be worth more than face value? ›
Certain series (such as I bonds) offer a combination of both. Paper bonds continue to earn interest beyond their face value (amount printed on the bond) until they reach final maturity, which is normally 30 years. Older paper bonds can be worth several times more than their 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 |
Yes. Face value refers to the dollar value of a financial instrument when it is issued. The face value of a bond is the price that the issuer pays at the time of maturity, also referred to as “par value.” By comparison, the face value of a stock is the price set by the issuer when the stock is first issued.
Should you buy bonds when interest rates are high? ›
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
You can count on a Series I bond to hold its value; that is, the bond's redemption value will not decline.
What is it called when you sell a bond above its face value? ›
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.
What is the difference between fair value and face value? ›
Here's a quick guide on the four most common terms: 🔹 Face Value The original value of a security as stated by its issuer. It's typically fixed and used mainly for bonds and common stock issuance. 🔹 Fair Value An estimate of the price at which an asset should trade in a "fair" market.
What is a bond selling for an amount above face value? ›
When a bond is selling for an amount above the face value, it can be said to be selling or trading at a premium. When a bond sells at a discount, the price is always lower than the face value. The significant reasons for discount bonds are to ensure lower prices and offset their lower yields.
How much would a $50 savings bond be 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 |
Maturity dates for Series EE bonds
Currently, Series EE bonds are guaranteed to earn a fixed interest rate for 20 years, which is when the bond matures. At 20 years, the government ensures that you will be paid double the face value of the bond.
