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I am having a hard time understanding municipal bonds. What is the par value vs. purchase price? What is the call date? What is the call price? The coupon rate is just the interest paid out to you for investing in a bond, right?

  • This is actually several questions in one; note that the second big question about investment strategies is off-topic because it's specifically asking for investment recommendations. Can you trim your question down to one main question, e.g. "what do these terms mean in the context of the municipal bond market? ... etc"? The Investopedia guide to bonds might be a good resource for you too. – John Bensin Aug 4 '13 at 20:42
  • Yea I can trim it down and make it more concise and on topic, I love investopedia! I read that article but I've still got a couple questions. – noname Aug 4 '13 at 20:54
  • I gave you a brief summary of each of these terms, but definitely read the Wikipedia articles I linked to (even if you only read the introduction at first) and the Investopedia introduction as well. If you have more questions that would be on-topic (for example, not too broad, not specifically asking for investment advice, etc.), you can ask a new question and we'll be happy to help. – John Bensin Aug 4 '13 at 21:01
  • Remember that if you found Keith's or my answer hepful, you can accept one by clicking the checkmark next to it. There's no pressure, though; only if an answer actually answered your question to your satisfaction. – John Bensin Aug 20 '13 at 2:57
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Unless stated otherwise, these terms apply to all bonds.

Par value vs purchase price

The par value or face value of a bond refers to the value of the bond when it's redeemed at maturity. A bond with a par value of $10,000 simply means that if you purchase the bond and hold it until the maturity date specified in the contract, you receive $10,000.

The purchase price, however, is exactly that: it's what you paid for the bond. Bonds may sell below, at, or above par. Continuing the example from above, if you paid $9,800 for a bought a bond with a $10,000 par value, you bought the bond below par.

A bond selling below par is said to be selling at a discount. For bonds selling above bar, they're selling at a premium. If the purchase price and the par value are the same, the bond is selling at par.

Call price and call date

These terms apply to callable bonds only, which are bond contracts that allow the issuer of the bond (in the case of municipal bonds, the institution or agency who created the contract) to buy back from bond holders at a given date (the call date) and at a given price (the call price) before the bond reaches maturity and pays the holder the full par value.

Coupon rate

Yes, the coupon rate is essentially the interest paid. It's usually represented as a percent of the par value, so if the $10,000 in the example above had a 5% coupon rate, this means that it paid out 0.05 * 10,000 = $500 each year. Usually, this payment is made as two semi-annual payments of $250.

Some bonds are zero-coupon bonds, which means exactly what you would think; they don't make any coupon payments. U.S. Treasury Bills are one example of a zero-coupon bond.


All of these factors are linked, because the coupon rate, callable provisions, and par value, along with the overall economic environment, can affect the purchase price of a bond.

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  • Par Value: The "face value" of the bond, which will be paid at maturity.
  • Purchase Price: The current market price to buy the bond (or the price at which you bought it)
  • Call Date: The date on which the bond can be redeemed, prior to maturity, for a "Call Price" at the bond issuer's option. Differs from the "Maturity Date", which is the date at which the par value will be paid by the issuer to the current bondholder. Basically allows an "early payoff" option, but incorporates a "payoff penalty" in the form of a higher call price.
  • Coupon Rate: A percentage of the bond's face value which is paid periodically (usually annually, though some have semi-annual or quarterly coupon payouts).

Bonds are valued based on all of this, using the concept of the "time value of money". Simply stated, money now is worth more than money later, because of what you can do with money between now and later.

Case in point: let's say the par value of a bond is $100, and will mature 10 years from this date (these are common terms for most bonds, though the U.S. Treasury has a variety of bonds with varying par values and maturation periods), with a 0% coupon rate (nothing's paid out prior to maturity). If the company or government issuing the bonds needs one million dollars, and the people buying the bonds are expecting a 5% rate of return on their investment, then each bond would only sell for about $62, and the bond issuer would have to sell a par value of $1.62 million in bonds to get its $1m now.

These numbers are based on equations that calculate the "future value" of an investment made now, and conversely the "present value" of a future return. Back to that time value of money concept, money now (that you're paying to buy the bond) is worth more than money later (that you'll get back at maturity), so you will expect to be returned more than you invested to account for this time difference. The percentage of rate of return is known as the "yield" or the "discount rate" depending on what you're calculating, what else you take into consideration when defining the rate (like inflation), and whom you talk to.

Now, that $1.62m in par value may be hard for the bond issuer to swallow. The issuer is effectively paying interest on interest over the lifetime of the bond. Instead, many issuers choose to issue "coupon bonds", which have a "coupon rate" determining the amount of a "coupon payment". This can be equated pretty closely with you making interest-only payments on a credit card balance; each period in which interest is compounded, you pay the amount of interest that has accrued, to avoid this compounding effect.

From an accounting standpoint, the coupon rate lowers the amount of real monies paid; the same $1m in bonds, maturing in 10 years with a 5% expected rate of return, but with a 5% coupon rate, now only requires payments totalling $1.5m, and that half-million in interest is paid $50k at a time annually (or $25k semi-annually). But, from a finance standpoint, because the payments made in the first few years are worth more than the payments made closer to and at maturity, the present value of all these coupon payments (plus the maturity payout) is higher than if the full payout happened at maturity, and so the future value of the total investment is higher.

Coupon rates on bonds thus allow a bond issuer to plan a bond package in less complicated terms. If you as a small business need $1m for a project, which you will repay in 10 years, and during that time you are willing to tolerate a 5% interest rate on the outstanding money, then that's exactly how you issue the bonds; $1 million worth, to mature in 10 years and a 5% coupon rate. Now, whether the market is willing to accept that rate is up to the market. Right now, they'd be over the moon with that rate, and would be willing to buy the bonds for more than their face value, because the present value would then match the yield they're willing to accept (as in any market system, you as the seller will sell to the highest bidder to get the best price available). If however, they think you are a bad bet, they'll want an even higher rate of return, and so the present value of all coupon and maturity payments will be less than the par value, and so will the purchase price.

  • The call date isn't equivalent to the maturity date; the call date is the date that a callable bond can be redeemed by the issuer before the maturity date, at a given call price. – John Bensin Aug 7 '13 at 17:37
  • Not to nitpick, but the call price is usually higher than par value. It's very rare for the call price to be below par value because this discourages investors from purchasing the bond (since both the par value and call price are in the bond contract, they're known to investors). The Wikipedia article on callable bonds has a lot of good information on callable bonds if you're unfamiliar with them. – John Bensin Aug 7 '13 at 20:17

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