How to Calculate Par Value With Call Premiums

by C. Taylor

Bonds may be callable or non-callable. Callable bonds give the issuer, such as a corporation or government, the option of terminating the bond contract before the maturity term passes. The issuer may exercise this option when prevailing interest rates drop. This is similar to how a homeowner may refinance a mortgage when offered a lower interest rate. Investors recognize that non-callable bonds that can't end early offer greater investment security, so bond issuers sweeten the deal with a call premium. This call premium is the percentage of the par value — or face value — paid when the issuer exercises the call option. With the call premium and call price known, you may calculate the bond's par value.

1. Divide the call premium by 100 to convert it into decimal format. For example, a 2.5 percent call premium divided by 100 gives you 0.025.

2. Add 1.0 to the result. In the example, adding 1.0 gives you 1.025.

3. Divide the call price by the previous result. For example, a call price of \$102.5 divided by 1.025 yields a par value of \$100.

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