Definition: Sub Par is a golfing phrase describing an item that underperforms or doesn’t perform as expected. It is a term that refers to a situation where results obtained are below the average.
What Does Sub Par Mean?
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In financial scenarios, a security trading sub par is one that is currently being priced by the market below its nominal value. For example, a bond that has a face value (the actual amount of money that will be paid by the company when it reaches maturity) of a $1,000 and is currently being valued at $850 is said to be trading sub par, which means, below its actual value.
The reason why this occurs is that the interest rate paid by the bond is less than the rate the market expects for such instrument. This expected rate is frequently calculated by using the risk-free rate of return (which is the interest rate offered by securities graded as AAA) plus a risk premium that depends on the market’s overall risk and the risk of the company or organization issuing the financial instrument.
In other business situations, as is the case of production figures, a company with an installed capacity to produce 5,000 units per day that is currently producing only 2,500 could also be regarded as operating on a sub par basis.
Example
International Paint Co. is a company that manufactures rubber-based paint and has distributors and franchisees all over the world. The company currently has many ongoing expansion projects but it needs financing in order to continue developing them.
They have an outstanding bond issue that is currently being valued at 95% of its face value, due to the fact that the bonds pay an interest rate of 2% and currently the risk-free rate of return is also 2%, but since the company has a bigger risk than these AAA securities, to compensate for such difference, the market is valuing the bonds at a sub par basis. The company now has to evaluate what would be the most advantageous interest rate that they should offer for the new bonds they are about to issue.
