Under par

A security is issued under par, when its issue price or quotation is lower than its nominal value. That is why it is said that it is issued at a discount .

When a security is issued or traded under par, it means that its issue or price is below its nominal value.

Under par in the primary market

That title can be an action (in Spain the issuance of shares under the pair is not allowed), an obligation,  a bond  or any fixed income value  .

On the other hand, the issue and trading price is usually expressed as a percentage of the nominal value. Therefore, a security will be quoted or issued under par when it is below 100. The difference is called the issuance discount.

If a bond is quoted under this modality, its  internal rate of return (IRR)  is considered to be greater than its issuance rate, or explained in another way, the coupon rate is less than the return. Yields rise when bond prices go down and yields go down when bonds go up, there is therefore an inverse relationship between the price of a bond and its profitability.

That is why the bond market adjusts bond prices so that yields are up to   current interest rates with similar maturities and risk characteristics. In the real-life bond market, calculations are not so simple, because other factors such as credit quality and economic point of view, maturity calculation, supply and demand balance and market perception of a Concrete bonus risk may affect its price.

The yield in its simplest form is an instantaneous measure of the return of a bond at any given time, which is calculated by dividing the nominal interest by the current price of the bond.

r = i / P

being,

r = Performance

i = Nominal interest rate

P = Bonus price

Under par in the secondary market

It is important to mention that the concept under the pair not only refers to a fixed income or variable income issue , it also refers to its way of trading in the secondary or trading market. For example, if a bond trades (based on 100) at 95 and the issue value or nominal value was 98, we say that it is trading under par. A bond is then under par when its internal rate of return is higher than the profitability of the coupon of that bond. If a share was issued with a nominal value of 5 euros and is listed at 4.95 euros, we say that the value is listed under par.

Example

Suppose that an investor buys a fixed income security worth 98. Therefore, he will only have to pay 98% of the nominal value of the security. Upon expiration, you will receive 98% plus the remaining 2% to complete 100% of your nominal value. The investor, therefore, will have obtained a gross return of 2%.

 

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