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Finance: What are Above Par and At Par? 8 Views

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What are Above Par and At Par? Above par is when bonds trade at higher prices than face value. At par is when bonds are trading at face value. It seems to make sense that bonds would trade at their face value, but above par trading happens when interest rates are dropping, creating a lesser yield and higher price as they have an inverse relationship.

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Transcript

00:00
Finance- a la shmoop....What are above par below par and at par...First what is [Man discussing at par on a golf course]
00:09
at par and yeah this may be not enough to make the tour but not too shabby but
00:14
what about in the finance world if a bond or other dead or preferred stock is
00:19
trading at par or at a hundred it's trading at face value and investors
00:25
buying the bond expect to get a return that matches the bonds coupon or [Dollar bills falling]

00:30
interest or distribution rate at par bonds are rare though most trade either
00:35
above or below par well when interest rates drop investors are willing to pay
00:40
more for older bonds with higher coupons and bonds will then trade above par when
00:46
interest rates increase while those lower interest rates look about as [Interest rates go up on a see-saw]
00:50
appealing as mold on your roast beef sandwich and bonds will trade below par
00:55
for less than the face value well interest rates aren't the only things
00:59
that effect a bonds ability to trade at par by the way company news can affect
01:04
it as well like if an alien spaceship attacks your factories and kidnaps your [Alien spaceship shoots factory and explosion occurs]
01:08
staff well your bonds value likely will decrease so let's say a bond yields 7%
01:14
meaning that for each thousand bucks you get 35 dollars paid to you twice a year
01:18
well this bond was issued eight years ago and now similar risk bonds have gone
01:22
way up in price and yields have gone way down so this bond might be quoted at 110
01:27
meaning that you pay eleven hundred dollars for that same sheet of paper
01:31
today so that your yield is not in fact 7% but rather 10 percent less than 7%
01:39
because you've paid and percent more for the bond that is you paid 10% over par
01:44
that new yield is 6.3% you paid 10 points over par for
01:48
the same 35 bucks twice a year that you're getting so that's above par below
01:52
par and at par if you're ever more than 30 above par well there's probably at [golf club stuck in a tree]
01:57
least one club stuck in a tree somewhere or swimming in a lake
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