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When the contract rate of interest on bonds is higher than the market rate of interest, the bonds sell at an amount greater than face value (this is known as a premium).
A Contractual Interest Rate: What Is It?
The particular interest rate outlined in a note payable or bond payable's conditions is known as a contractual interest rate. The amount of interest actually paid to a note or bond holder is calculated by multiplying this rate by the note or bond's face value.
How Does Face Value Work?
A financial concept known as "face value" refers to a security's nominal or monetary value as indicated by its issuer. The initial cost of the stock, as stated on the certificate, serves as the face value for stocks. In the case of bonds, it refers to the sum that is normally paid in $1,000 increments to the holder at maturity. The term "par value" or simply "par" is frequently used to describe the face value of bonds.
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