Plain-English investing notes, one idea at a time — every number checked against a primary source.

Bonds & RatesGlossary

Principal

Principal is the amount of money borrowed, lent or first invested. For a bond, it is the face value repaid at maturity. Definition and a worked example.

Also called: face value, par value

By The Token Thesis Desk2 min read6 cited sources

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Quick answer

Principal is the amount of money borrowed or lent, or the amount you first invest. For a bond, the principal is its face value (par value): the sum the issuer promises to repay at maturity, separate from interest.

What does principal mean?#

Investor.gov defines principal as the total amount of money being borrowed or lent, or the initial amount of money invested[1]. With a savings account it is your deposit; with a loan it is the amount you borrowed; with a bond it is the amount the issuer borrowed from you.

For bonds, Investor.gov adds that the principal is also known as the face value or par value, and that the issuer promises to repay it when the bond matures[2]. Interest — the coupon — is paid on top of the principal, not out of it.

Is principal the same as what you paid?#

Not always. A bond's principal is fixed, but its market price changes. Investor.gov notes that a bond selling above its principal (par) amount is selling at a premium[3]; below par, it sells at a discount. Either way, an investor who holds to maturity gets back the face value[4], so the gap between price paid and principal becomes a gain or a loss.

Worked example

A $5,000 bond bought at three prices

Suppose the price is set as a percentage of face value. At 98 you pay $4,900 and receive the $5,000 principal at maturity, a $100 gain. At 102 you pay $5,100 and get back $5,000, a $100 loss. A 4% coupon pays $200 a year on the $5,000 principal in every case.

Price quotedYou payPrincipal repaid at maturityGain or loss on principal
98% of face value$4,900.00$5,000.00+$100.00
100% of face value$5,000.00$5,000.00$0.00
102% of face value$5,100.00$5,000.00-$100.00

Figures computed in code from the stated inputs; rounded to the nearest cent or tenth.

Can you lose principal?#

Yes. FINRA reminds brokers to explain the credit risk, or risk of default, of an issuer and how it might affect the safety of the invested principal[5]. And if you sell before maturity, you may receive more or less than the face value[6]. For bond funds, FINRA notes that return of principal is not guaranteed because the fund's net asset value fluctuates[5]. Read what a bond is, bond funds vs individual bonds and how compound interest works, where principal is the starting balance.

Sources

Numbers in brackets in the text point here. Grade A = primary source (regulator, statistics agency, law or official document).

  1. 1
    Principal (glossary)U.S. SEC — Investor.gov (n.d.) · Grade A
  2. 2
    Bonds (glossary)U.S. SEC — Investor.gov (n.d.) · Grade A
  3. 3
    Premium (glossary)U.S. SEC — Investor.gov (n.d.) · Grade A
  4. 4
    Bonds, Selling Before Maturity (glossary)U.S. SEC — Investor.gov (n.d.) · Grade A
  5. 5
  6. 6
    BondsU.S. SEC — Investor.gov (n.d.) · Grade A

How we checked this note

Every number, date and rule above links to its source. This note cites 6 sources, 6 of them primary (Grade A). Worked examples were calculated in code, and a second editor compared each figure with its source before publishing. Spotted an error? Tell us — corrections are listed on the note. Read our editorial policy.