Definition
Par value, in finance, refers to the face value of a bond or a stock as it is stated in the corporate charter. For bonds, the par value is the amount that bond issuers will repay to bondholders at maturity. For stocks, it is the initial price at which the company agrees to sell its shares during distribution.
Key Takeaways
- Par Value is a stock’s “face value” set by the company upon issuance and does not typically indicate the actual market value of the stock. It is often a nominal amount used for legal purposes.
- Par Value also appears in bonds as the amount that is paid to bondholders at maturity. It is this value, rather than the market price, that determines the return a bondholder gets in the form of interest.
- It’s important to note that Par Value has no correlation to the market price of a security, and it largely holds significance for the issuer and not the investor. In the case of common stocks, par value often has no relation to market value.
Importance
Par Value is a crucial finance term as it represents the nominal or face value of a bond, share of stock, or a loan note.
It serves as a vital reference point used by market participants in calculations to measure economics of a security, interest payments, dividend distributions, and underwriting fees.
For bonds specifically, the par value is the amount the issuer promises to repay the bondholder once the bond matures while for stocks, it is the original cost of the stock as indicated on the certificate.
Thus, understanding par value is integral in assessing the financial health and value of a company, and aids investors in making informed financial decisions.
Explanation
Par Value serves a significant purpose in finance in regards to both stock and bond investments. In terms of stock, par value is generally a nominal value assigned to a share when it is issued, giving some legal safeguard.
This was historically crucial because it serves as the minimum price a company could issue shares for to avoid being insolvent. It plays a pivotal role in determining the minimum capital that a corporation will raise through the issuance of shares, protecting the investors from the risk of the company not achieving sufficient capital.
In the context of bonds, par value, also known as the face value, represents the amount that is returned to the bondholder once the bond matures. It serves as a benchmark to calculate other crucial bond characteristics like yield and interest payments, playing an influential role in defining the income an investor could expect from the bond.
It is crucial to note that although a bond’s market price might fluctuate during its lifespan due to various factors such as alterations in interest rates or credit rating, the par value remains consistent and is fully reclaimed upon maturity.
Examples of Par Value
Corporate Bonds: Many corporations issue bonds to raise capital for their operations. For example, a company might issue a 10-year bond with a par value of $1,This means the bondholder will receive $1,000 when the bond matures after 10 years, regardless of the price at which the bond was initially purchased.
Treasury Securities: Government entities also issue debt instruments, such as treasury bills, bonds, and notes. The U.S. Treasury, for instance, offers treasury bonds in various denominations with $1,000 being the typical par value; therefore, upon maturity, the bondholder would receive this agreed amount.Stocks: Companies issue shares of stock at a par value which is often a nominal amount like $
01 per share. For instance, if Google issues a new share of stock with a par value of $01, but sells it for $1,500, the par value is still stated as $
01, even though the actual market value is significantly higher. This par value often has little relationship to the market value, but it establishes a minimum price that shares can be traded at when first issued. The difference between the par value and the selling price is often recorded in a separate account called ‘Paid-in Capital in Excess of Par.’
FAQs about Par Value
What is par value?
Par value is the face value of a bond as stated by the issuer, also known as nominal value or face value. It is the amount that the issuer promises to pay the bondholder when the bond matures.
What is the significance of par value in stocks?
In stocks, par value is the minimum price that a company can issue shares for. However, it is largely a symbolic amount and stocks typically trade at market value rather than par value.
Is par value the same as market value?
No, par value and market value are not the same. Market value is the price at which a bond or stock is currently trading in the market, which can fluctuate based on supply and demand. On the other hand, par value is a fixed amount that doesn’t change.
What happens when a bond is sold above its par value?
When a bond is sold above its par value, it is being sold at a premium. This typically happens when the coupon rate of the bond is higher than prevailing market interest rates, causing investors to pay a premium for the bond’s higher yield.
What happens when a bond is sold below its par value?
When a bond is sold below its par value, it is being sold at a discount. This can occur when the coupon rate of the bond is lower than prevailing market interest rates, causing investors to pay less for the bond’s lower yield.
Related Entrepreneurship Terms
- Face Value
- Bond Maturity
- Coupon Rate
- Zero-Coupon Bond
- Share Capital
Sources for More Information
- Investopedia: A trusted online resource for investment and finance education including a wide range of articles, dictionary terms, tutorials, exam prep quizzes, and more.
- Corporate Finance Institute: Provides financial analyst certification programs, resources, free guides, and articles on a wide array of finance topics.
- Khan Academy: A non-profit educational organization created to provide a free, world-class education in various subjects including finance and capital markets.
- Money Crashers: An online platform that aims to educate individuals in making wise choices about credit and debt, investing, education, real estate, insurance, spending, and more.
