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Par Value



Definition

Par value, also known as face value or nominal value, is the stated value of a security, such as a bond or stock, when it is first issued. It represents the minimum price at which the security can be sold or redeemed and usually differs from its current market value. For bonds, par value indicates the amount that will be paid to the bondholder upon maturity, while for stocks, it commonly denotes the initial capital per share contributed by the shareholders.

Phonetic

The phonetic pronunciation of “Par Value” is /pɑr ˈvæl·yu/.

Key Takeaways

  1. Par Value represents the nominal or face value of a bond or stock: In finance, par value is the value assigned to a bond or stock when it is first issued. This value typically represents the minimum price at which a bond or stock can be purchased or redeemed and is used to calculate interest payments and dividends.
  2. Par Value is mostly associated with bonds: Although both bonds and stocks can have par values, it is more commonly associated with bonds. The par value of a bond usually signifies the amount of money that the bond issuer must pay back to the bondholder when the bond matures. For stocks, par value is often a nominal amount set by the company and has little impact on the actual market value of the shares.
  3. Par Value can affect interest payments and yield calculations: With bonds, the interest payment that a bondholder receives is typically calculated as a percentage of the bond’s par value. This value also plays a significant role in calculating a bond’s yield, a measure that investors use to evaluate the returns on their bond investments.

Importance

Par value is an important concept in business and finance as it represents the nominal value assigned to a security, such as stocks or bonds, when they are first issued. This value, often set at a minimal amount, serves as a baseline for various financial calculations, such as determining dividend payments or interest rates on bonds. Furthermore, par value plays a crucial role in accounting practices, as it establishes the minimum price at which stocks or bonds can be traded without violating regulatory requirements. By understanding the significance of par value, investors and companies can better assess the financial health of an organization and make informed decisions related to trading and the issuance of new securities.

Explanation

Par value, also known as face value or nominal value, serves a crucial role in the financial and business realms, predominantly for bond issuers and investors. Although it may seem like a mere reference point, this fundamental value attributed to a financial instrument helps dictate the interest payments on a bond, and oftentimes, the repayment amount upon maturity. For issuers, setting the par value indicates a commitment towards repaying that amount to bondholders upon bond maturity, which establishes trust with investors. Moreover, par value provides a base for calculating interest payments, usually expressed as a percentage, thereby ensuring a steady income stream for investors. In the context of stocks, par value serves as the minimum price at which shares can be legally issued, representing the company’s minimal liability to shareholders in case of liquidation. Financial markets and regulatory bodies also employ par value in various ways, resulting in a range of practical applications. When utilized as a benchmark, par value helps investors gauge the performance of bonds and equities on the market compared to their original value. In addition, par value contributes to determining the accounting value of a bond on the issuer’s books, which in turn aids issuers in maintaining regulatory compliance, managing liability reporting, and assessing their overall debt position. From an investor’s standpoint, understanding par value equips them with insights and the necessary context to formulate investment strategies based on the historical performance, price fluctuations, and yield potential of financial instruments. Overall, par value serves as a foundational component in the mechanics of the financial market, enabling accurate measurement, valuation, and risk assessment for all parties involved.

Examples

1. Corporate Bonds: ABC Corporation issues a $1,000 par value bond with a 5% annual coupon rate, which means the bond will pay $50 (5% of $1,000) annually in interest. Investors who purchase this bond are guaranteed to receive this amount regardless of the bond’s market price. 2. Preferred Stock: XYZ Company issues preferred stock with a par value of $25 per share and offers an annual dividend rate of 4%. The stock will pay $1 (4% of $25) in dividends to the preferred stockholders every year, regardless of the company’s ongoing performance or the stock price in the market. 3. Government Treasury Securities: The U.S. government issues a series of 10-year Treasury notes with a par value of $10,000. A fixed interest rate is set, let’s say 2%, meaning the interest payments over the 10 years will equal $200 annually per security. At the end of the maturity period, the bondholder will receive the par value of $10,000.

Frequently Asked Questions(FAQ)

What is Par Value?
Par Value, also known as face value, nominal value, or stated value, refers to the original price or nominal value assigned to a security, bond, or preferred stock when it is first issued. It represents the minimum price at which a bond or stock can be sold and typically remains constant throughout its lifetime.
Why is Par Value important for bonds?
Par Value is important for bonds as it determines their interest payments (coupon rate) and maturity value. Investors receive interest payments based on the bond’s par value, and upon maturity, the bondholder will receive the par value back. Par Value also serves as a baseline for valuing bonds in the market.
How does Par Value differ for stocks?
For preferred stocks, Par Value represents the minimum value the stock is typically allowed to be sold, and it also plays a role in determining dividend payments. In the case of common stocks, Par Value is largely symbolic and hold little relevance due to market fluctuations and share price changes.
Can a bond or stock trade above or below its Par Value?
Yes, a bond or stock can trade above (premium) or below (discount) its Par Value based on market conditions, interest rates, the credit quality of the issuer, and other factors influencing the market’s perception of its value. A bond may trade at a discount when interest rates rise or when the issuer’s credit quality declines.
How is Par Value connected to a company’s balance sheet?
On a company’s balance sheet, Par Value serves as the basis for recording the issuance of stock. It separates the value of the shares issued into two components: Par Value, which is credited to the common or preferred stock account, and additional paid-in capital, which represents the excess received over the Par Value.
What are the implications of a stock having zero or no Par Value?
A stock that has a zero or no Par Value removes any contractual restrictions that may arise due to a stated Par Value. It allows the company more flexibility to decide its share price when issuing shares, leading to less potential legal issues if the company needs to issue shares below the Par Value.
How does Par Value affect the calculation of dividends?
In the case of preferred stocks, the dividend rate is often expressed as a percentage of the Par Value. The company will pay dividends to preferred shareholders based on this percentage, ensuring that these shareholders receive their dividend payments before any dividends are paid to common shareholders.

Related Finance Terms

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