What Is Par Value?

What Is Par Value?

Let me explain par value directly to you: it's the stated or face value of a financial instrument, mainly bonds and stocks, that's set when it's first issued. For bonds and other fixed-income assets, it indicates the maturity value and the dollar amount of the coupon or interest payments owed to the bondholder. You might also hear it called nominal or original value, and it's the opposite of market value, which changes daily.

Understanding Par Value

You should know that par value is the face value of assets like bonds, determining the instrument's maturity value and the dollar value of coupon payments. This differs from the asset's market price, which can be above or below par based on factors such as interest rates and credit status. Bonds commonly have a par value of $1,000, though $100 isn't unusual.

For stocks, the par value is stated in the corporate charter, and shares often have no par value or a very low one, like one cent per share. Once set, it's the lowest limit for the stock's value, but it's usually unrelated to the market price.

Par value is a key part of fixed-income securities, representing a contractual agreement between the issuer and bondholder. The issuer must repay the par value to the lender at maturity. When companies issue par value stocks, they often set it inconsistently with market value to minimize contractual obligations for themselves and shareholders, as par value creates a binding contract.

Par Value of Bonds

The par value of a bond is the amount the issuer promises to repay bondholders at maturity—essentially, bondholders are loaning money to the issuer. Bonds can trade at a premium or discount depending on economic interest rates. For instance, a bond with a $1,000 face value trading at $1,020 is at a premium, while one at $950 is at a discount. Regardless, the issuer always repays the par value at maturity.

The coupon rate decides if a bond trades at, below, or above par. This rate is the interest paid annually or semi-annually to bondholders for the loan. When market rates are lower, bonds trade above par; when higher, they trade at a discount.

Calculating Par Value

A stock's par value doesn't change and is set when shares are issued, stated on the stock certificate. For bonds, par value includes the face value plus annual or semi-annual coupon payments owed by the issuer.

Take a bond with $1,000 par value and 4% coupon rate: it pays $40 annually (4% of $1,000). If issued when market rates are 4%, it trades at par since rates match. If rates rise to 5%, the bond's value drops below par because its rate is less attractive. If rates fall to 3%, it rises above par as the 4% is more appealing.

Corporate bonds usually have par values of $100 or $1,000, municipal bonds $5,000, and Treasury Bills are sold at discounts to par in $100 multiples.

Par Value of Stocks

Some states, like Florida, require companies to set a par value below which shares can't be sold. To comply, most set a minimal par value. For example, Apple's par value is $0.00001, and Amazon's is $0.01. Shares can't be sold below this at IPO to ensure no preferential pricing.

Some states allow no-par value stocks, identified by 'no par value' on certificates. You can find a company's stock par value in the Shareholders' Equity section of the balance sheet.

Reasons Companies Set Par Value

Companies set par values for several reasons, focusing on equities, though not every company faces the same needs. First, it meets legal requirements in many jurisdictions, ensuring a minimum capital level when incorporating and issuing stock.

It also offers creditor protection by setting a floor on equity capital, keeping a base amount in the company that can't all be distributed as dividends. Additionally, even if nominal, par value can shape investor perceptions, signaling that the company meets legal standards and boosting confidence in its stability.

Finally, it aids accounting and financial reporting by separating the nominal share value from additional paid-in capital, giving a clearer picture of financial health for analysts and regulators.

Par Value vs. Market Value

The issuer determines a financial instrument's par value, while market value is the current trading price on the open market, fluctuating with buys and sells. Bonds can be bought above or below par based on interest rates and sentiment. Stocks, with near-zero par values, usually have market values much higher, driven by company performance and sentiment.

Market value also depends on supply and demand, economic conditions, prices, interest rates, exchange rates, and investor sentiment.

Par Value and Accounting

In accounting, par value of issued shares goes into the common stock account on the balance sheet, with amounts above par in additional paid-in capital (APIC). For example, if $1 par shares sell for $5, $1 per share is in Common Stock, and $4 in APIC, distinguishing nominal value from extra contributions.

This affects the equity section's presentation, providing transparency on capital sources without changing total dollars. Par value influences legal capital calculations, preserving retained earnings for creditor protection under GAAP. For no-par stocks, all proceeds go to common stock, simplifying accounting but possibly facing restrictions.

What Is Par Value at Maturity?

Par value at maturity is what the bond issuer pays the bondholder when the bond matures. For a $1,000 par bond maturing in a year, you receive $1,000 from the company on that date.

What Does No-Par Value Mean?

No-par value means a stock has no set minimum price per share, so its value is purely market-determined. Companies use this to avoid liability if prices drop and to simplify accounting by not tracking par-market differences.

Are Bonds Issued at Par Value?

Bonds aren't always issued at par; they can be at a premium or discount based on interest rates. Above par is a premium, below is a discount.

What Is the Relationship Between Coupon Rate and Par Value?

The coupon rate and market interest rates decide if a bond trades at, below, or above par. Equal rates mean trading at par; rising rates make lower-coupon bonds trade below par; falling rates make higher-coupon bonds trade above par.

Is a Stock or Bond Required to Have Par Value?

In some jurisdictions, securities must have a par value, but it's not always required; sometimes stocks or bonds can be issued without one.

The Bottom Line

To wrap this up, par value is the face value of a bond or stock certificate in the corporate charter. For stocks, it's often unrelated to market trading values. For bonds or fixed-income, it's required to define maturity value and coupon payments.