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1Repair Windows errors before they cause bigger problems2Scan for outdated or missing drivers - takes under a minute3Clear out junk files and repair common Windows errorsAt maturity, a bond generally pays its face value (also called par value or principal), not whatever price you paid in the market. Buying at a discount can produce a gain as the price moves toward par; buying at a premium can produce a loss on the principal difference. Those price effects are reflected in your yield to maturity, while the bond’s contractual maturity principal stays the same.
If you sell before maturity, you receive the bond’s market sale price, which can be above or below par. If the issuer redeems the bond early under a call provision, you receive the call price specified in the bond terms—usually face value, sometimes with a call premium—plus accrued interest through the redemption date. Every outcome assumes the issuer meets its obligations.
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What par, premium and discount mean
A bond is a debt security. The issuer borrows money from investors and promises interest payments and repayment of principal under the bond’s terms. The principal amount specified for repayment is the bond’s face value, par value or simply principal.
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- At par: The market price equals the bond’s face value. A $1,000 bond priced at $1,000 is trading at par.
- At a premium: The market price is above face value. A $1,000 bond priced at $1,100 is trading at a $100 premium.
- At a discount: The market price is below face value. A $1,000 bond priced at $900 is trading at a $100 discount.
These labels describe the relationship between the current price and the bond’s face amount. They do not, by themselves, amend the principal written into the bond contract.
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What you receive when you hold a bond to maturity
When a bond reaches its maturity date, the issuer generally pays the face-value principal plus any coupon interest due under the bond’s payment schedule. A bond bought for $900, $1,000 or $1,100 can therefore have the same $1,000 maturity payment if each is the same $1,000-face-value issue.
The obligation is contractual, not guaranteed by the price you paid. The issuer must be able and obligated to pay. Corporate-bond investors face the possibility that an issuer will miss interest or principal payments, enter bankruptcy or otherwise default. Bondholders often have a higher claim than shareholders in a bankruptcy, but other creditors can have equal or higher priority.
What changes when you buy at a discount
Suppose you buy a $1,000-face-value bond for $900 and hold it until maturity. If the issuer pays as promised, you receive the scheduled coupon payments and $1,000 principal at maturity. The $100 difference between your purchase price and the principal received contributes to your return.
What changes when you buy at a premium
Suppose you pay $1,100 for that same $1,000-face-value bond. You still receive the scheduled coupons and $1,000 at maturity, so the $100 price difference works against your return. The coupon income may compensate for some or all of that difference, depending on the coupon rate, time remaining and reinvestment of payments.
What happens when you buy at par
If you pay $1,000 for a $1,000-face-value bond, there is no initial premium or discount to amortize through the maturity date. Your return still depends on coupon payments, timing, taxes, reinvestment and whether the issuer pays in full.
How the purchase price affects yield to maturity
Yield to maturity (YTM) estimates the annualized return from buying a bond at its current price, receiving its scheduled payments and holding it until maturity. It incorporates the purchase price, coupon payments, time remaining and repayment of face value.
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The U.S. Securities and Exchange Commission’s Investor.gov corporate-bond illustration uses a 10-year bond with a $1,000 face value and a 4% coupon. The coupon is $40 per year, shown as two $20 payments when paid semiannually. The example is educational, not a current market quote or forecast.
| Market price | Price relationship | Example YTM | Annual coupon | Principal at maturity |
|---|---|---|---|---|
| $1,000 | At par | 4.00% | $40 ($20 semiannually) | $1,000 |
| $900 | 10% discount | 5.31% | $40 ($20 semiannually) | $1,000 |
| $1,100 | 10% premium | 2.84% | $40 ($20 semiannually) | $1,000 |
The coupon and maturity principal are unchanged in all three examples. The lower purchase price raises the return calculated by YTM; the higher purchase price lowers it. The figures do not show how often bonds trade at each price in the broader market.
Three different events investors often confuse
| Event | What the holder generally receives | Important qualification |
|---|---|---|
| Hold to maturity | Face-value principal plus coupon interest due under the terms | The issuer must meet its obligations; the indenture and credit risk control the actual outcome. |
| Sell before maturity | The bond’s market sale price | The price may be above or below par. A commission or broker markdown can reduce proceeds. |
| Issuer calls before maturity | The contractual call price, usually face value, plus accrued interest; sometimes a call premium | Call dates, eligibility, notice and price are bond-specific. Coupon payments stop after the call. |
If you sell before maturity, you do not receive a maturity redemption
A secondary-market sale transfers the bond to another investor. The buyer pays the market price available at that time, rather than the issuer paying the face amount on the scheduled maturity date.
Why the market price can differ from par
For a typical fixed-rate bond, prices generally fall when market interest rates rise and rise when market rates fall. A bond with a longer remaining maturity generally has greater interest-rate sensitivity than a similar shorter-term bond. Changes in the issuer’s perceived credit quality, market liquidity and supply and demand can also affect the price.
For example, a bond with a coupon that is attractive relative to current rates may trade above par. If new bonds offer higher rates, the older bond’s price may fall below par so that its overall return is competitive. These market movements change what you receive in an early sale; they do not rewrite the face amount due at the scheduled maturity.
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Costs that reduce sale proceeds
The quoted price is not necessarily your net cash. Depending on the broker and transaction, a commission or markdown may be deducted. The amount and disclosure of that cost can vary by bond and broker. Thin trading can also make it harder to sell at the price you expect.
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What happens when an issuer calls a bond
A callable bond gives the issuer a contractual right to redeem the debt before its stated maturity, subject to the call schedule and conditions in the offering documents. Investor.gov’s callable-bond glossary states: “When an issuer calls its bonds, it pays investors the call price (usually the face value of the bonds) together with accrued interest to date and, at that point, stops making interest payments.”
Payments in an early redemption
- Call price: Usually the face value, although the terms may specify a premium above face value.
- Accrued interest: Interest earned from the last coupon payment date through the call date, as provided by the terms.
- Future coupons: They stop once the bond is redeemed, so you do not continue receiving interest through the original maturity date.
Why call terms matter
A bond’s call provisions identify when the issuer may call, how much it must pay and whether any protection period applies. A bond trading above par can be especially exposed to call risk because the issuer may redeem it at a specified call price rather than allowing the premium to persist until maturity. The exact answer comes from the bond’s prospectus, indenture, trade confirmation and official call notices.
Why premium and discount prices arise
The coupon rate is fixed by the bond’s terms, but the market’s required return changes. When investors demand a return higher than the bond’s coupon rate, the bond generally needs to trade below par to offer that higher return. When the coupon is more attractive than prevailing required returns, the bond can trade above par.
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Risks that can change what you actually receive
Issuer credit and default risk
The face amount is a promise, not an independent source of cash. An issuer that fails to pay can leave investors with delayed, reduced or no principal and interest. Review the issuer’s financial condition, the bond’s ranking and the governing documents rather than treating par repayment as automatic.
Interest-rate risk
Interest-rate changes matter most if you may sell before maturity or if you need to value the bond during its life. A rate increase generally pushes fixed-rate bond prices down; a rate decline generally pushes them up. Longer maturities usually experience larger price changes than comparable shorter maturities.
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Call and reinvestment risk
If a bond is called, the income stream ends early. You receive the call proceeds and must decide what to do with the money. If market rates are lower than when you bought the bond, replacing its coupon income may be difficult. A call premium, if any, is governed by the bond’s specific schedule.
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A bond can be worth a stated amount at maturity yet be difficult or costly to sell beforehand. A broker’s markdown, commission, a wide difference between buying and selling prices or limited trading activity can reduce your net proceeds.
Tax considerations
Tax treatment depends on the bond and the investor’s jurisdiction. Zero-coupon bonds can create taxable imputed interest before cash is received, depending on applicable rules. Do not assume that a discount, premium or accrued interest amount has the same tax treatment in every account or jurisdiction; consult current tax guidance for your circumstances.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to compare bonds before buying
Price alone does not tell you what you will earn or what risks you are accepting. Compare the following items together:
| Comparison point | Question to answer | Why it matters |
|---|---|---|
| Price versus face value | Am I paying par, a premium or a discount? | It determines the principal difference that YTM must incorporate. |
| Yield to maturity | What annualized return is indicated if I hold to maturity? | It combines price, coupons, timing and maturity repayment. |
| Coupon rate and schedule | How much interest is paid and how often? | It determines the cash-flow pattern before maturity. |
| Maturity date | When is the scheduled principal repayment due? | It sets the planned holding period and affects interest-rate sensitivity. |
| Call features | Can the issuer redeem early, when and at what price? | It can end the income stream before maturity. |
| Issuer credit quality | How strong is the issuer’s ability to pay? | Credit problems can prevent promised payments. |
| Sale costs and liquidity | What might I pay to exit, and how actively does it trade? | Net proceeds can be lower than the displayed market price. |
A practical process for determining your expected proceeds
- Confirm the face amount. Check the trade confirmation and offering documents for the bond’s principal denomination, such as $1,000.
- Identify the relevant date. Decide whether you are analyzing the scheduled maturity, a possible call date or an earlier sale. These are different cash-flow events.
- Record the purchase price. Label it as par, premium or discount by comparing it with face value.
- List contractual cash flows. Note the coupon rate, payment frequency, next payment date and any accrued-interest adjustment included in the trade.
- Read the call provisions. Check the first callable date, call prices, premium schedule and notice terms. Do not assume a bond will remain outstanding until maturity.
- Estimate the appropriate yield measure. Use YTM for a maturity scenario and review any yield-to-call information when an issuer can redeem early.
- Check issuer and transaction risks. Review credit information, liquidity, commissions or markdowns and the consequences of selling before the planned date.
- Verify tax treatment. Determine how coupon income, original issue discount, market discount, premium amortization and accrued interest apply to your account and jurisdiction.
Common misunderstandings
“I paid $1,100, so I will receive $1,100 at maturity.”
Not necessarily. Unless the bond terms specify a different redemption amount, a $1,000-face-value bond generally pays $1,000 principal at maturity. The extra $100 was the market premium you paid, not an addition to the issuer’s stated maturity obligation.
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“A discount means the issuer is already in default.”
No. A discount can result from market interest rates, maturity length, liquidity or credit concerns. Price is information, not proof of default. You must examine the issuer and the bond terms.
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“A bond that trades above par cannot lose money.”
A premium bond can lose value if rates rise, credit quality deteriorates or liquidity worsens. If you sell before maturity, your proceeds depend on the market price and transaction costs. If the issuer calls the bond, the call price may be below the market price you expected.
“A call is the same as normal maturity.”
No. A call is an issuer-initiated early redemption under specified terms. It can end coupon payments years before the original maturity date and create reinvestment risk.
“The SEC’s example predicts my return.”
The $900, $1,000 and $1,100 prices and their 5.31%, 4.00% and 2.84% yields are illustrative figures from Investor.gov. They are not current quotes, forecasts or a market-wide frequency study.
What documents control the final payment
For a particular bond, the governing documents—not a generic description of par, premium or discount—control the amount and timing of payments. Review the prospectus or offering document, indenture, trade confirmation, coupon schedule and any call notice. Those materials establish the face amount, maturity date, interest calculation, call rights, redemption price and payment procedures.
Also distinguish the quoted clean price from any accrued interest shown on a trade confirmation. The amount exchanged at settlement can include both the negotiated bond price and interest accrued since the last coupon date; the bond’s payment terms determine the subsequent coupon and redemption amounts.
Bottom line
For a bond held to scheduled maturity, the issuer generally returns face value—par—plus the coupon interest due, whether you originally paid a discount, par or a premium. The purchase price changes your yield, not the stated maturity principal. Selling early substitutes the market price for maturity redemption, while an issuer call pays the bond’s specified call price, usually face value, plus accrued interest and possibly a premium. Before relying on any expected amount, verify the issuer’s credit, call provisions, maturity, trading costs and applicable tax rules.
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