Par Value
The par value of a bond is the amount that the issuer agrees to repay the bondholder at or by the maturity date. The amount is also referred to as the face value, principal value, redemption value and maturity value. Bonds can have any par value for eg. Rs.1000, Rs.100,000, Rs.500,000 or Rs.10,00,000.
Due to the different par value of bonds, the practice in bond markets is to the quote the price of a bond in Rs.100 and multiples of 1 paise.
For example, a bond with a face value of Rs.1000 and quoting at Rs.98. If an investor wants to buy 100 of these bonds, the value of the bonds for the investor will be as follows:
Rs.98 x 100 bonds x 10 = Rs.98,000
To convert the market price of the bond to its price as per its par value, the market price needs to be multiplied by the multiple. In the above case, the multiple is 10 as the par value is Rs.1000 and the market price is 101.
Similarly, a bond with a face value of Rs.500,000 and quoting at Rs.105. If an investor wants to buy 1bond only, the value of the the bond for the investor will be as follows:
Rs.105 x 1 bond x 5000 = Rs.525,000
Bonds may trade above or below its par value. When a bond trades above its par value, it is trading at a premium. Similarly, if it trades below its par value, it is trading at a discount.
Coupon Rate
The coupon rate is the interest rate payable by the issuer at a pre-determined frequency to the bond holder. The frequency of interest payment can be monthly, quarterly, half yearly or annually. This payment that the client receives at a pre-defined frequency is called coupon or interest.
Calculation of coupon or interest is as follows:
Coupon / Interest = Coupon / Interest rate x Par Value
For example, a bond with a coupon rate 8.66% and a par value of Rs.1000 will pay annual interest of Rs.86.60 (= Rs.1000 x 8.66%)
Coupon rate along with the maturity date is indicated in the description of the bond. For example, 8.66% IIFCL 22/01/2034 means IIFCL is paying 8.66% coupon rate and the bond matures on Jan 22nd, 2034.