General Education Development (GED) Practice Exam

The par value of a bond is the?

1. Average interest rate paid by a given type of bond over subsequent issues

2. Amount of time until the bond matures

3. Amount paid when the bond matures

4. Amount of interest that the bond pays

The correct answer is: Amount paid when the bond matures

The par value of a bond refers to the amount that is paid to the bondholder when the bond matures. This is also known as the face value or nominal value of the bond, and it represents the original value of the bond as stated by the issuer. At maturity, the bondholder will receive this amount as a return on their investment, assuming the issuer has not defaulted. In the context of bonds, the par value is crucial because it establishes the basis for calculating interest payments, typically referred to as coupon payments, which are a percentage of the par value. Other choices do not accurately define par value: the interest rate pertains to the payments made, the time until maturity does not relate directly to par value, and while interest payments are a function of par value, they are not synonymous with it. Therefore, recognizing the par value as the amount that will be paid at maturity is key to understanding bond investments.