LeoGlossary: Principal

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The amount owed on a mortgage or other debt.

When broken down to individual payments, the principal is the part of that remittance that goes towards paying down the loan as opposed to the interest.

With securities, a bond or note’s principal is the par value, that will be paid at the maturity date. Principal does not include any interest paid over the life of the bond.

For example, a 4 percent, 20-year bond with a par value of $5,000 will pay $200 a year in interest to bondholders, or $4,000 over the full term. The $4,000 in interest is independent of the $5,000 principal.

Depending on how the bond market has shifted since the bond was issued, the bond may not trade for exactly the value of its principal. If the market rate is 5 percent, for example, the $5,000 bond with a 4 percent coupon will be less attractive to potential buyers than other investments. As a result, the bond will sell for less than $5,000, or at a discount. Conversely, a $5,000 bond with a 6 percent coupon will sell for more than its principal, or at a premium.


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