Par yield is when a bond’s coupon rate and yield are equal, resulting in the bond being priced at face value. Bond prices and yields are inversely related, and an even yield occurs when the bond is at par. Zero coupon bonds are an example of bonds selling below par.
The par yield, also known as the par rate, is when the coupon rate and the yield on a bond are equal and the price of the bond will be the same as its face value, also called face value. The face value is the payment made to a bond investor at maturity, and the coupon rate is the annual interest rate he receives. The yield, or yield to maturity (YTM), is typically an estimate of the average return on a bond investment if the bond is not sold before maturity. The YTM is required to calculate all future payments in current terms. Yield at par can occur because a bond can be priced at par, below par, or above par, and when the bond is at par, the yield and coupon rate will be the same.
Similar to many other instruments in finance, bond prices and yields rise and fall as a result of many factors that influence supply and demand. However, it must be remembered that bond prices and yields are inherently inversely related; in other words, as bond prices rise, for example, bond yields will fall, and vice versa. For example, if a bond is priced above par, it will generally have a coupon rate that is higher than the yield. Theoretically, the yield will have to increase to cause the price to fall until the price reaches par. At the same time, the coupon rate and the yield will be the same, and one would have what is called an even yield.
When the bonds are listed on the market, among other details, they will show the coupon rate, the price of the bond, and the yield. To illustrate the point of an even yielding bond, one might consider using a hypothetical example. A bond might be priced above par at 103.31 and might have a coupon rate of 5.75 and a yield of 4.74. An upward move in the yield, eventually reaching the coupon rate level at 5.75, will bring the price of the bond down to par or 100, and then a par yield would have been achieved. Otherwise, the price will fall to par while generating an increase in yield until it equals the coupon rate.
In practice, it is rare to find a bond trade at precisely par. Some bonds will trade very close to par, between 99 and 101, for example. When bonds trade between these two securities, they are considered more or less at par.
A type of bond called a zero coupon bond is a good example of a bond that is selling at a discount or below par. Unlike many other bonds, this type does not pay any coupons to the holder between the day of purchase and maturity. At maturity, the investor will receive face value, which may allow them to make a profit on the difference between the discounted price and face value.
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