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 is the lowest legal price for which a company can sell its shares.
Par value is essential for a bond or a fixed-income instrument as it indicates its maturity value and the dollar value of the coupon payments due to the bondholder.
Key Takeaways
- Par Value refers to the face value of a bond or stock as stated in the corporate charter.
- It is often unrelated to the actual market value of the trading shares.
- Determines the maturity value and coupon payments in bonds.
Understanding Par Value
Par value is the face value of a bond, determining its maturity value and the dollar value of coupon payments. The market price of a bond can be above or below par, influenced by interest rates and the issuer’s credit status. Typical par values for bonds are $1,000 or $100.
For stocks, par value is stated in the corporate charter, often very low such as one cent per share. It is the baseline value per share but unrelated to a stock’s market price.
Par Value of Bonds
The par value is the amount a bond issuer promises to repay bondholders at maturity. Bonds may trade at a premium or a discount. A bond’s coupon rate, the interest paid to bondholders, influences whether it trades at par, below par, or above par. Low market interest rates drive bond prices above par, while high rates drive them below par.
Calculating Par Value
- Stocks: The par value remains constant as stated on the stock certificate.
- Bonds: Combines the face value plus periodic coupon payments. For example, a $1,000 bond with a 4% coupon rate will yield annual interest payments of $40 ($1,000 x 4%). Market interest rates will affect whether it trades above or below par.
Par Value of Stocks
Some states mandate companies set a minimum par value for shares. This prevents shares from being sold below this threshold, ensuring fair treatment for all investors. Some stock certificates might indicate “no par value”, offering flexibility in initial pricing.
Par Value vs. Market Value
- Par Value: Set by the issuing entity and often static.
- Market Value: The current trading price, which varies based on market conditions. Bonds may trade above or below par depending on interest rates, while stocks usually trade higher than par value due to very low initial par values.
Why Par Value Is Important for Investors
- Bonds: Represents the contractual repayment amount at maturity, pivotal in fixed-income investment strategy.
- Stocks: Though typically minimal, par value plays a role in the regulatory framework ensuring equitable trading practices on initial offerings.
What Is a Bond’s Par Value?
A bond’s par value is the repayment amount promised at maturity along with the basis for coupon payments to bondholders.
What Is a Stock’s Par Value?
Defined in the corporate charter, it’s usually minimal and does not reflect the market trading price.
Are Bonds Issued at Par Value?
Not always; bonds could be issued at a premium or a discount, influenced by prevailing interest rates.
Relationship Between Coupon Rate and Par Value
The coupon rate, combined with market rates, determines a bond’s trading level relative to its par value. Matching rates mean trading at par; discrepancies drive the bond above or below par.
The Bottom Line
Par value signifies the stated face value in a corporate charter for stocks and the requisite legal par value for fixed-income instruments. Though unrelated to market price, it sets the baseline for bond repayments and consistent coupon distributions.
Related Terms: face value, market value, coupon rate, corporate charter, premium bond, discount bond.
References
- Merrill “The Terminology of Bonds”.
- Business Development Bank of Canada. “Par Value of Shares”.
- Financial Industry Regulatory Authority. “Bond Basics”.
- U.S. Security and Exchange Commission. “Interest Rate Risk – When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall”, Pages 1-2.
- Financial Industry Regulatory Authority. “Bond Basics”.
- Municipal Securities Rulemaking Board. “How Are Municipal Bonds Quoted and Priced?”, Page 2.
- U.S. Department of the Treasury, Bureau of the Fiscal Service. “Treasury Bills”.
- The Florida Legislature. “The 2021 Florida Statutes”.
- U.S. Securities and Exchange Commission. “Apple 2021 10-K”, Page 1.
- U.S. Securities and Exchange Commission. “Amazon 2021 - 10-K”, Page 1.
- The Iowa Legislature. “Chapter 493: Stock Without Par Value”, Page 1.
- Museum of American Finance. “Stock Certificate Reference Guide”, Page 2.
- U.S. Security and Exchange Commission. “Financial Reporting Manual”.
