What Is Par Value?
Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate, as stated in the corporate charter.
Stock certificates issued for purchased shares show the par value. The par value of shares, or the stated value per share, isthe lowest legal price for which a company sells its shares.
Par value is required for a bond or a fixed-income instrument and shows its maturity value and the dollar value of the coupon, or interest, payments due to the bondholder.
Key Takeaways
- Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate, as stated in the corporate charter.
- The face value of the stock stated in the corporate charter is often unrelated to the actual value of its shares trading on the open market.
- Par value is imperative for a bond or a fixed-income instrument because it defines its maturity value and the dollar value of coupon payments.
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Understanding Par Value
Par value is the face value of a bond and determines a bond or fixed-income instrument's maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and its credit status. The par value for a bond is often $1,000 or $100, the usual denominations in which they are issued.
A share of stock's par value is stated in the corporate charter. Shares usually have no par value or low par value, such as one cent per share. Once defined, it is the lowest limit set to the value of a share of stock. The par value, however, is commonly unrelated to a stock's market price.
The terms "par value" and "face value" are interchangeable and refer to the stated value of a financial instrument at the time it is issued.
Par Value of Bonds
The par value is the amount of money a bond issuer promises to repay bondholders at maturity. Bondholders essentially loan money to the bond issuer.
Bonds can trade at a premium or a discount depending on the level of interest rates in the economy. A bond with a face value of $1,000 trading at $1,020 is trading at a premium, while another bond trading at $950 is considered a discount bond. Whether a bond is trading at a discount or premium, the issuer always repays the par value to the investor at maturity.
A bond's coupon rate determines whether a bond will trade at par, below par, or above par value. The coupon rate is the interest payment made to bondholders, annually or semi-annually, as compensation for loaning the bond issuer money. When market interest rates are lower, bonds trade above par. When market interest rates are higher, bonds trade at a discount.
Calculating Par Value
A stock's par value never fluctuates and is determined when shares are issued and formally stated on the stock certificate. A bond's par value is the face value of the bond plus coupon payments, annually or sem-annually, owed to the bondholders by the issuer of the debt.
A bond with a par value of $1,000 and a coupon rate of 4% will have annual interest payments of 4% x $1,000 = $40.
If a 4% coupon bond is issued when market interest rates are 4%, the bond is considered trading at par value since both market interest and coupon rates are equal.
If market interest rates rise to 5%, the value of the bond drops, and the bond will trade below par because the bond is paying a lower interest rate to its bondholders compared to the higher interest rate of 5% of other bonds in the market.
If market interest rates fall to 3%, the value of the bond will rise and trade above par since the 4% coupon rate is more attractive than 3%.
While the par value of a corporate bond is usually stated as either $100 or $1,000, municipal bonds typically have par values of $5,000. Treasury Bills are sold at a discount to par in multiples of $100.
Par Value of Stocks
Some states require that companies set a par value below which shares cannot be sold. To comply with state regulations, most companies set a par value for their stocks to a minimal amount. The par value for shares of Apple (AAPL) is $0.00001, and the par value for Amazon (AMZN) stock is $0.01.
Shares cannot be sold below this value upon initial public offering to reassure investors that no one is receiving preferential price treatment.
Some states allow the issuance of stock with no par value. An investor can identify no-par stocks on stock certificates as they will have "no par value" printed on them. The par value of a company's stock can be found in the Shareholders' Equity section of the balance sheet.
Par Value vs. Market Value
A financial instrument's par value is determined by the institution that issues it. Market value is the current price at which a bond or stock can be traded on the open market and constantly fluctuates as investors buy and sell bonds and shares of stock.
A bond can be purchased for more or less than its par value, depending on interest rates and market sentiment. Because shares of stocks are commonly issued with a par value near zero, the market value is often higher than the par value. Investors count on gains made by thechanging value of a stockbased on company performance and market sentiment.
Why Par Value Is Important for Investors
Par value is a primary component offixed-income securitiessuch as bonds and represents the value of a contractual agreement, a loan, between the issuing party and the bondholder. The issuer of a fixed-income security is liable to repay the lender the par value on the maturity date.
Companies issue shares of stock to raise equity, and those that issuepar value stocks often do at a value inconsistent with the actual market value. This adjustment allows companies to minimize their and the shareholders’ contractual obligations, as par value carries a binding contract between an organization and its shareholders.
What Is a Bond's Par Value?
A bond is essentially a written promise that the amount loaned to the issuer will be repaid. The par value is the amount of money that the issuer promises to repay bondholders at the maturity date of the bond. The par value also determines the dollar value of coupon payments.
What Is a Stock's Par Value?
Par value is the stock's value stated in the corporate charter. Shares usually have no par value or low par value, such as one cent per share does not reflect a stock's market price. Some states require that companies set a par value below which shares cannot be sold.
Are Bonds Issued at Par Value?
Bonds are not necessarily issued at their par value. They could also be issued at a premium or a discount depending on the level of interest rates in the economy. A bond that is trading above par is said to be trading at a premium, while a bond trading below par is trading at a discount.
What Is the Relationship Between Coupon Rate and Par Value?
The coupon rate, the periodic interest payments made to bondholders as compensation for loaning the issuer the money, and the market interest rates determine whether a bond will trade at, below, or above its par value. If the coupon rate equals the interest rate, the bond will trade at its par value. If interest rates rise, the price of a lower-coupon bond must decline to offer the same yield to investors, causing it to trade below its par value. If interest rates fall, then the price of a higher-coupon bond will rise and trade above its par value since its coupon rate is more attractive.
The Bottom Line
Par value is the face value of a bond or the value of a stock certificate stated in the corporate charter. A stock's par value is often unrelated to the actual value of its shares trading on the stock market. Par value is required for a bond or a fixed-income instrument and defines its maturity value and the value of its required coupon payments.
