Above Par

Above Par Par Value Bonds Securities Credit Quality Market Conditions Trading
The term 'above par' refers to a situation where a security, typically a bond, is trading at a price above its face value or par value. This can indicate a strong demand for the security and may reflect favorable market conditions or high credit quality of the issuer.
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Detailed Definition

Above Par refers to a situation where a security, most commonly a bond, is trading at a price higher than its face value (also known as par value). For instance, if a bond has a par value of $1,000 but is currently trading at $1,050, it is said to be trading above par. This often occurs when the fixed interest rate (coupon rate) of the bond is higher than the prevailing rates in the market, making the bond more attractive to investors.

Examples

  1. Corporate Bond:

    • A corporate bond with a par value of $1,000 is being traded on the bond market for $1,100. In this case, the bond is trading above par because its market price exceeds its face value by $100.

  2. Municipal Bond:

    • A municipal bond with a par value of $5,000 is currently quoted at $5,250 in the bond market. This bond is also trading above par because its selling price is higher than its par value.

  3. Treasury Bond:

    • A U.S. Treasury bond with a par value of $10,000 is being sold for $10,500. Here, the bond is over par, as buyers are willing to pay more than the face amount.

Frequently Asked Questions

Q1: Why do bonds trade above par? A1: Bonds trade above par when their fixed coupon rate is higher than the prevailing interest rates, making them more attractive to investors. This can also happen if the issuing entity’s creditworthiness improves or if there is a general increase in bond demand.

Q2: Can stocks trade above par? A2: Yes, stocks can trade above their par value, though par value is often set very low for stocks and is not as significant as it is for bonds.

Q3: What is the impact of a bond trading above par on yield? A3: When a bond trades above par, its yield to maturity is generally lower than its coupon rate because investors pay more initially but receive the same nominal interest payments.

  1. Par Value: The nominal or face value of a bond or stock as stated by the issuing entity. For bonds, this is the amount paid to the holder at maturity.
  2. Coupon Rate: The annual interest rate paid on a bond, expressed as a percentage of the face value.
  3. Yield to Maturity (YTM): The total expected return of a bond if it is held until it matures, considering its current market price, coupon payments, and maturity value.
  4. Discount Bond: A bond trading below its par value.
  5. Premium Bond: Another term for a bond trading above its par value.

Online References

  1. Investopedia: Above Par Definition
  2. Investopedia: Understanding Bonds
  3. Khan Academy: Bond Pricing

Suggested Books for Further Studies

  1. “Bond Markets, Analysis, and Strategies” by Frank J. Fabozzi
  2. “The Bond Book” by Annette Thau
  3. “Fixed Income Securities: Tools for Today’s Markets” by Bruce Tuckman and Angel Serrat
  4. “Investing in Bonds For Dummies” by Russell Wild

Accounting Basics: “Above Par” Fundamentals Quiz

### A bond with a par value of $1,000 is trading for $1,050. Is this bond above or below par? - [x] Above par - [ ] Below par - [ ] At par - [ ] None of the above > **Explanation:** A bond trading for $1,050 when its par value is $1,000 is trading above par as it is priced higher than its face value. ### What signifies a bond trading above par? - [ ] The bond's price is equal to its face value. - [ ] The bond's coupon rate is below the market rate. - [ ] The bond's price is below its face value. - [x] The bond's price is above its face value. > **Explanation:** A bond trading above par signifies that its market price is higher than its face value. ### If a bond's market price is higher than its par value, what can be inferred about its yield to maturity? - [x] The yield to maturity will be lower than the coupon rate. - [ ] The yield to maturity will be higher than the coupon rate. - [ ] The yield to maturity is irrelevant. - [ ] The yield to maturity remains the same as the coupon rate. > **Explanation:** When a bond is trading above par, its yield to maturity will be lower than the coupon rate because the investor pays more but receives the same interest payments. ### Which of the following is a reason why a bond might trade above par? - [ ] Falling creditworthiness of the issuer - [x] Higher coupon rate compared to prevailing market rates - [ ] Decreased demand for bonds - [ ] Increased interest rates > **Explanation:** A bond might trade above par if its coupon rate is higher than prevailing market interest rates, making it attractive to investors. ### Is the concept of 'above par' applicable to stocks in the same way as to bonds? - [x] No, par value in stocks is typically not as significant. - [ ] Yes, stocks trade the same way as bonds. - [ ] Stocks cannot trade above par. - [ ] Par value of stocks determines dividend payout. > **Explanation:** While stocks do have a par value, it is typically set very low and doesn't play a significant role in trading like it does for bonds. ### What does a premium bond refer to? - [ ] A bond trading below par - [x] A bond trading above par - [ ] A bond at face value - [ ] A government-backed bond > **Explanation:** A premium bond is another term for a bond trading above its par value. ### How would an increase in the creditworthiness of the issuer affect the bond price? - [x] Increase the bond price above par - [ ] Decrease the bond price below par - [ ] Have no effect on the bond price - [ ] Cause the bond price to remain at par > **Explanation:** An increase in the issuer’s creditworthiness can lead to an increase in the bond price, potentially pushing it above par. ### What is the difference between coupon rate and yield to maturity for a bond trading above par? - [x] The coupon rate is higher than the yield to maturity. - [ ] The coupon rate is lower than the yield to maturity. - [ ] They are equal. - [ ] Yield to maturity is not defined for bonds trading above par. > **Explanation:** For a bond trading above par, the coupon rate is higher than the yield to maturity. ### When might investors prefer bonds trading above par? - [ ] When interest rates are expected to drop significantly. - [x] When they seek a higher fixed income return in a low-interest-rate environment. - [ ] When they want capital appreciation. - [ ] When the bond’s maturity is longer. > **Explanation:** Investors might prefer bonds trading above par when they seek higher fixed income returns, especially in a low-interest-rate environment. ### What happens to the market price of a bond if interest rates increase? - [x] The market price decreases. - [ ] The market price increases. - [ ] The market price remains constant. - [ ] The market price fluctuates without any pattern. > **Explanation:** When interest rates increase, the market price of bonds typically decreases as new bonds are issued with higher coupons, making existing bonds less attractive.

Thank you for exploring the world of bond trading and tackling our sample quiz questions. Keep enhancing your financial acumen!

Tuesday, August 6, 2024
Above the Line Deductions
Abnormal Loss
At Par January 1, 1
Face Value January 1, 1
Nominal Value January 1, 1
Par Value January 1, 1
Yield Spread January 1, 1
American Depositary Receipt (ADR) January 1, 1
Auction Exchanges January 1, 1
Below Par January 1, 1
Bid and Asked January 1, 1
Bond Broker January 1, 1

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