Below par refers to a bond price that is currently below its face value. Below par bonds are said to be trading at a discount, and the price will be quoted below 100. Bonds trade below par as interest rates rise, as the issuer’s credit rating falls, or when the bond’s supply greatly exceeds demand.

What are bonds sold below par value called?

If the price is above par, the bond is selling at a premium and if the price is below par, the bond is selling at a discount. Price is generally quoted as a percentage of face value. For example, a price of 98 means 98% of the bond’s $1,000 par value, or $980.

How bonds are bought and sold?

Treasury and savings bonds may be bought and sold through an account at a brokerage firm, or by dealing directly with the U.S. government. Once new-issue bonds have been priced and sold, they begin trading on the secondary market, where buying and selling is also handled by a broker.

What does it mean when a bond is selling for below par?

If the bond is selling for below par, its price is selling for less than its face value. As bond prices are quoted as a percentage of face value, a price below par would typically be anything less than 100. Below par refers to a bond price that is currently below its face value.

Why are bonds bought and sold at a premium?

But bonds are routinely bought and sold at prices above and below par in the bond market. The price an investor is willing to pay for a bond is a function of interest rates. If new bonds of a certain type are being issued at par with 7% coupons, at a yield of 7%, then an old bond of the same type with a 6% coupon has less market value.

How does the price of a bond differ from its face value?

The price of a bond issue often differs from its face value. The amount a bond sells for above face value is a premium. 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.

What happens when you sell a bond at a discount?

In general, if you buy a bond at a discount, when the bond matures or when you sell it, assuming you are selling it at a higher price than you paid for it, you have to pay capital gains tax on the difference between the price you paid and either par (if you held to maturity) or the price you sold it for.