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At Par



Definition

The financial term “At Par” refers to a situation where a security is traded at its face or nominal value. It is neither at a discount (below nominal value) nor at a premium (above nominal value). The term is commonly used for bonds, stocks, and commodities.

Phonetic

The phonetics of the keyword “At Par” is /æt pɑːr/

Key Takeaways

  1. ‘At Par’ generally signifies equality. It’s mainly used in finance and investment sectors, where it represents that a financial instrument is trading at its face value. This may include bonds, shares, or other financial securities.
  2. Typically, the term ‘At Par’ is used while discussing bonds. If a bond is being bought or sold ‘At Par,’ it implies that the investor is purchasing or selling the bond at exactly the same value as its face value. It deviates from discounted or premium bonds, where the buying/selling takes place below or above the face value.
  3. Finally, ‘At Par’ can also indicate the state of an exchange between currencies of two countries, where their value is equal. Conversely, ‘Above Par’ and ‘Below Par’ are terms used to signify the condition when a currency or financial instrument’s value deviates from its face value.

Importance

The term “At Par” is vital in business and finance as it refers to a situation where a security, such as a bond or stock, is trading at its face value or original price. It’s particularly essential in the bond market where it signals that a bond is not trading at a discount (below initial price) or a premium (above initial price). This information helps investors assess the value of their investment. If a bond is trading at par, it typically signifies that the investment’s yield is equal to the bond’s coupon rate, serving as an essential benchmark for the investment’s performance. Furthermore, in the context of exchange rates and international trade, ‘at par’ indicates a one-for-one exchange of two currencies, implying equivalency and absence of profit or loss at that moment.

Explanation

The finance/business term ‘At Par’ holds significant credibility in the financial world, particularly in bonds and securities, and it exhibits a distinct utilization. The term is primarily used when the value of an asset, often a bond or security, is equal to its face or original value. The purpose of determining whether a security is ‘At Par’ is to provide potential investors with a clear and precise knowledge about the current market value of the security and its face value. When a bond is issued ‘At Par’ , it means that the issue price and the nominal value of the bond are equivalent. Therefore, it is not being sold at a premium (above the face value) or a discount (below the face value). In the realm of finance and business, the concept of ‘At Par’ offers crucial insights into a company’s financial health and the inherent risk in investing in its bonds; it serves as a key indicator for investors when assessing the potential return of an investment. Another common application of ‘At Par’ is in foreign exchange, where it is used to indicate that a currency is neither under nor overvalued against another currency. The usage of ‘At Par’ ensures that there are no subjective elements impacting the trade and that the transaction happens on a fair ground, based purely on the market price, providing a transparent and efficient platform for financial transactions.

Examples

1. Bond Sales: In the world of bonds, selling at par means that the bond is being sold for its face value, neither at a premium, nor a discount. For instance, if a company issues a bond with a face value of $1,000, the price at which investors buy the bond constitutes its selling price. So, if the bond is sold for exactly $1,000, it is said to be selling at par. 2. Forex Exchange: In foreign currency exchange, a currency is said to be at par when its value is essentially equal to another currency. For instance, if 1 US dollar trades for 1 Canadian dollar, they would be considered to be trading at par. 3. Bank Lending: Banks sometimes offer par loans wherein the loan amount is equal to its face value and the borrower doesn’t need to pay any discount points. For example, if a bank approves a mortgage loan for a customer worth $200,000, with no need for the customer to pay any discount points, the loan is said to be given at par.

Frequently Asked Questions(FAQ)

What does the term ‘At Par’ mean in finance and business?
‘At Par’ refers to a situation where a security, bond, or any other financial instrument is trading at its face value.
Is it possible for financial instruments to trade above or below ‘At Par’?
Yes, instruments can trade above par (at a premium) or below par (at a discount) depending on the interest rates, credit rating of the issuer, market conditions, etc.
What does it mean when a bond is issued ‘At Par’?
When a bond is issued ‘At Par’ , it means the bond is issued at its face value. For example, a bond with a face value of $1000 is issued ‘At Par’ if investors are actually paying $1000 to purchase it.
What determines whether a bond will trade at, above, or below par?
Multiple factors influence this, such as changes in interest rates, the creditworthiness of the issuer, time to maturity, etc. If current interest rates are lower than the bond’s coupon rate, the bond may trade above par.
Is ‘At Par’ a good indicator of the performance of a financial instrument?
Not necessarily. While an ‘At Par’ value indicates that a security is trading at face value, it is not a direct reflection of its potential return or risk level. Other aspects such as interest rates, maturity period, issuer’s financial stability should also be considered.
What happens to bondholders if a bond is called at par?
If a bond is called at par, bondholders will receive the par value (face value) of the bond, effectively closing their investment. It’s important to remember that an issuer typically retains the right to call a bond if it’s in their interest to do so.
What is the difference between ‘At Par’ and ‘Par Value’?
‘Par Value’ refers to the face value of a security at the time it’s issued. ‘At Par’ , on the other hand, talks about the current trading scenario of that security. If a security is trading ‘At Par’ , it is trading at its original face value.

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Sources for More Information


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