# What Is the Principal of a Bond?

## Principal of a Bond

The principal of the **bond**, also called its face value or par value, refers to the amount of money the issuer agrees to pay the lender at the bond’s expiration.

The principal of a bond is usually either $100 or $1000, but on the open market, bonds may also trade at a premium or discount on this price.

Before discussing more about the principal of a bond, let’s first discuss what a bond is.

## Bond Definition

A bond is a certificate of debt issued by a company.

They are purchased by an investor, making them small scale loans held by individuals.

Bonds are securities, like **stocks**.

However, instead of buying a piece of a company in return for **equity** ownership, bonds provide their return on investment through **interest** paid on the principal of the bond.

## How Does a Bond Work?

Bonds have three components: the **principal**, the **coupon** **rate**, and the **maturity** **date**.

These 3 components are used to calculate a** bond’s yield.**

The **principal** of the bond, also called its face value or par value, refers to the amount of money the issuer agrees to pay the lender at the bond’s expiration.

The **principal of a bond** is usually either $100 or $1000, but on the open market, bonds may also trade at a **premium** or **discount** on this price.

The **coupon** **rate** is the percentage of the principal paid back to the investor as interest.

Whatever the principal is, the coupon rate is a percentage of that value.

The bond **maturity** **date** is the date on which the principal must be paid back to the bondholder.

The bond issuer will make interest payments while holding onto the investor’s money, and will also pay back the principal of the bond.

Depending on whether the bond was sold at a **discount** or a **premium**, the principal of the bond may be slightly higher or lower than the original investment.

## Bond Price

Because bonds get sold at a premium or a discount of the principal, and the coupon rate is a percentage of the principal, the bond’s yield will be slightly higher or lower.

If the bond is sold at a premium, then the bond’s yield will be lower than the coupon rate.

That’s because *the principal is in the denominator* when calculating the coupon rate, so when you buy a bond at a premium you are increasing the denominator of that equation.