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I understand that a bond priced at $100 (par) has a face value of $1000 (or a quantity of 1m). But I'm confused as to when these should be used in conversation. The nomenclature makes me assume there are two different scenarios in which they should be used.

Is there a fundamental difference between the two terms? If so, which context would you choose to use them?

Update for clarification:
At Fidelity, they price their bonds with 100 being par. So a $1,010 bond would have a listed price of $101.0 but you would still end up paying $1,010 for the bond. I guess that x10 multiplier is where I was confused. Why markets price Fixed Income at a divided price.

  • Does the price quote acually have the currency? Bond are typically prices on a "percentage of par" bases and most bonds have a $1,000 "par" value (meaning one bond entitles you to $1,000 at maturity. – D Stanley Feb 7 '17 at 19:25
  • You're right, it's just a quote, no currency, they even say: "Quantity is the number of bonds. 1 bond equals $1,000 face value." I'm satisfied I guess – Fueled By Coffee Feb 7 '17 at 19:27
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    I think you may simply be confusing 'price' and 'par'. They're not the same thing (as I said in my answer). "price" is how much you pay for it. "par" is how much it's worth at maturity. You might reword your question more (your 'update for clarification' is going in that direction, but you're still conflating 'price' and 'par' there incorrectly). – Joe Feb 7 '17 at 19:34
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A bond's par value, or face value, is how much it's worth at maturity. So a bond that matures in 2020 with a par value of $1000, will pay whomever holds it then $1000.

A bond's price is how much you can buy that bond for. It doesn't directly relate to the par value; of course the par value matters since you wouldn't buy a bond that has a par value of $1000 for $100,000 unless it had an absurdly high coupon value, but still, there's not a direct relationship. Bonds might trade for higher or lower than their par value.

Your example of a bond with a price of $100 is a bond trading at a significant discount; you could well have bonds priced at $1100 with a par value of $1000, just as easily. It depends on the bond - how much risk is there, does it pay coupons (interest), etc., as well as general market conditions.

And of course the price changes over time, both as you get closer to maturity the coupons have less value (as there are less of them) and the risk reduces (as there is less time for a default and there are fewer unknowns), as the situation with the issuing company or government changes, and as the market changes over time. That $100 bond might be $200 next week if the bond market rallies, or it might be $50 if the issuing company has bad results that suggest it's likely to default.

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In the US, most bonds have a $1,000 "par" value, meaning that if you buy 1 bond you are entitled to get $1,000 when the bond matures. Interest is also quoted in terms of "percentage of par" - so if a bond has a 2% coupon you will get $20 per year (typically split into 4 quarterly payments) per bond in interest payments. The par value of a bond does not change over time.

Prices (which do change over time) are often quoted in "percent of par" terms, meaning a bond that trades at par will have a price quote of 100, so you pay $1,000 for each bond. A bond quoted at 97 will cost you $970, etc.

If you see a price quote near 100 it is almost certainly a "percent of par" quote. Theoretically you could have a $1,000 bond sell for $100, but that means the company has roughly an 80-90% change to default on the bond before it matures.

  • I think you're underestimating the chances of default in the last paragraph. The NPV (Net Present Value) of a bond depends on both its expected value on maturation and the interests paid until then. A $100 bond is probably a bond that will pay interest for a while, but likely will have a (partial) default on maturation. If the maturation date is very near, i.e. next month, and no interest is due, then the $100 is the expectation value. I.e. the chance of a (partial) default must exceed 90%. So in either case, the chance of a default can't be 80%. – MSalters Feb 8 '17 at 8:47
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    True, but remember that you must discount back future cash flows, so any interest and redemption will be worth less today that they will be in the future, so the value would be less than $20 if the chance of failure was 20% over, say, 10 years. I was not including interest payments that would increase the value, so that point is taken. That said, my point was not to accurately determine the chance of failure but to indicate that a quote of "100" is most likely a percentage of par quote, not an amount paid for one bond. – D Stanley Feb 8 '17 at 14:43

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