What is Principal?
In finance, principal refers to the face amount of a debt instrument or an amount of money borrowed.
How Does Principal Work?
For example, if you borrow $25,000 from XYZ Bank to purchase a car, the principal balance is $25,000. As time goes by and you make payments on the loan, the principal balance goes down.
For bonds, principal generally refers to the bond's face value or the par value. Thus, a bond with a $10,000 face value represents a $10,000 loan to the issuer (i.e., $10,000 of principal). It is usually equal to the amount the bondholder receives on the bond's maturity date.
Why Does Principal Matter?
Interest o
n any loan, bond or not, typically accrues on the outstanding principal balance. That is, the lower the principal outstanding, the less total interest the lender earns.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Several years ago, the federal government rolled out legislation meant to keep Americans from stashing their cash overseas. In 2010, the...
Read More →
Whether you’re a seasoned investor or simply keeping up with market news, you’ve likely come across the term “stock split”. A stock split occurs when a company increases the total number of its...
Read More →
A flash-in-the-pan stock rally can come from anywhere....
Read More →
New college graduates may find themselves in a bind. They have significant student loans to pay off, but...
Read More →
PC maker Dell (Nasdaq: DELL) kickstarted the era of affordable personal computers -- and made many people very...
Read More →
