Why Is the Settlement Amount Different From the Face Value?

Written By Security Bank ()

Updated at September 9th, 2020

Face amount, also known as par value, is the amount that the bondholder will receive at maturity date assuming the issuer of the bond does not default. On the other hand, the settlement amount is the amount that the bondholder pays or receives for the face value; it accounts for the accrued interest, taxes and applicable fees.

When a security is traded at a discount (YTM > Coupon rate), the settlement amount may be less than the face amount. On the other hand, when a security is traded at a premium, (YTM < Coupon rate), the settlement amount is greater than the face amount.