Par bond

A bond priced at 100 because its coupon rate equals its yield to maturity. Rate trees are calibrated to reprice par bonds, and a swap's fixed leg is priced like one.

Where you will meet it

Par bond appears in 3 learning outcomes on the CFA syllabus. A few of them:

• Explain how bootstrapping extracts zero-coupon (spot) rates from the par curve
  CFA Level II · Fixed Income

  “For two years, a par bond priced at 100 pays its coupon at year one and coupon plus principal at year two; subtract the year-one coupon discounted at the known one-year spot rate, and the remainder must be the present value of the final payment, which gives the two-year spot rate.”

• Explain the pricing of interest rate swaps, and work out their no-arbitrage value and say what it means
  CFA Level II · Derivatives and Risk Management

  “A swap's fixed leg is priced like a par bond: the swap rate is (1 − final discount factor) ÷ sum of discount factors for the payment dates.”

• Explain how a binomial interest rate tree is calibrated so that it fits a given term structure
  CFA Level II · Fixed Income

  “Calibrating a tree means choosing node rates so that it reproduces the market prices of the benchmark bonds, usually par bonds priced at 100.”

See also

Calibration · Yield to maturity

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with P · Glossary