Principal of a Bond

Written by True Tamplin, BSc, CEPF® | Reviewed by Editorial Team

Updated on December 19, 2022

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.

FAQs

What is a Bond's principal?

The principal of the bond, also called its face value or par value, refers to the amount of money (usually $100 or $1000) the issuer agrees to pay the lender at the bond’s expiration.

Can a Bond's principal value change?

Yes, the value of a bond moves inversely to changes in interest rates, so that when rates rise, the value of the bond declines and vice versa.

Who holds a Bond's principal after it is sold?

A bond's principal is held by the issuing company until the bond matures, at which time the issuer repays the prinicipal.

What are the three components of a Bond?

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

How are Bonds different than stocks?

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.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.

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