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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Above Par

Definition:

When bonds are built, they typically have a foundation. Just like a house. That foundation is called par. It's the number most of the other elements of the bond are built on. 

A typical bond might have par value of 100 and a stated coupon or yield of 5%. It means it's going to pay investors, on a thousand dollar investment, $25 twice a year. Let's say that the Fed lowers rates and/or the risk associated with this bond goes down. Investors will bid up the price of the bond so that it might yield only 4% or 2.5%. 

What would the bond have to be priced at to yield 2.5%? Well, it pays 50 bucks a year regardless of what the bond itself is trading at...that number is fixed and set in stone. So at $1,000, it yields 5%; if it were $1,500, it would still pay 50 bucks a year and yield 50 / 1,500 = 3.3%. So to yield 2.5%, the bond would have to be trading at TWICE its par value or $2,000 - its yield would be 50 / 2,000 = 2.5%.

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