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
- ‘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.
- 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.
- 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?
Is it possible for financial instruments to trade above or below ‘At Par’?
What does it mean when a bond is issued ‘At Par’?
What determines whether a bond will trade at, above, or below par?
Is ‘At Par’ a good indicator of the performance of a financial instrument?
What happens to bondholders if a bond is called at par?
What is the difference between ‘At Par’ and ‘Par Value’?
Related Finance Terms
- Face Value
- Par Value
- Bond Pricing
- Market Value
- Coupon Rate
Sources for More Information
