What is ‘Above Par’
A term used to describe the price of a security when it is trading above its face value. A security usually trades at above par when its income distributions are higher than those of other instruments currently available in the market.
If an investor purchases a security above face value, he or she will incur a capital loss at maturity when it is redeemed for face value.
Explaining ‘Above Par’
For example, a 5-year bond with $1,000 face value that pays a coupon of 10% annually may trade closer to $1,168 if similar bond rates decline to 6%. This is because investors are willing to pay more for a higher coupon; thus, it is said to be trading above par.
In order to make its yield equal current market rates, the bond should trade at its present value.
In the above example, the following calculation was used to determine the theoretical price the bond would trade at
N = 5 years
I/Y = 6 (market rate, 6%)
FV = $1,000 (face value)
PMT = $100 (10% coupon)
Payments/Year = 1 (annual coupon payment)
Further Reading
- An empirical comparison of published replication research in accounting, economics, finance, management, and marketing – www.sciencedirect.com [PDF]
- On the use of the economic concept of human capital in financial statements – www.jstor.org [PDF]
- 11 Finance, capital markets and economic growth in Japan” – books.google.com [PDF]
- Emerging financial markets and early US growth – www.sciencedirect.com [PDF]
- Historical perspectives on financial development and economic growth – www.nber.org [PDF]
- On the pricing of GDP-linked financial products – www.tandfonline.com [PDF]
- Alternative econometric approaches for analysing the role of the financial sector in economic growth: Time-series evidence from LDCs – www.sciencedirect.com [PDF]
- Technology, communication and the performance of financial markets: 1840–1975 – onlinelibrary.wiley.com [PDF]
