Key Takeaways
- Par value is fixed face value on issuance.
- Bonds repay par value at maturity.
- Stock par value sets legal minimum price.
- Par value affects bond coupons, not stock price.
What is Par?
Par, also known as face value or nominal value, is the fixed amount assigned to a stock or bond at issuance that remains constant regardless of market fluctuations. It serves as the baseline for valuation, coupon payments, and legal considerations in securities.
In bonds, par defines the principal amount repaid at maturity, while in stocks, it often sets a minimum issuance price with minimal market impact.
Key Characteristics
Par value has distinct features for bonds and stocks, offering clarity on financial obligations and legal capital.
- Fixed Amount: Par value is a predetermined figure stated on the security, unaffected by market price changes.
- Bonds: Typically $1,000 for corporate bonds, par value determines repayment at maturity and coupon calculations.
- Stocks: Usually a low nominal value (e.g., $0.01 or $1), par value sets the legal minimum issuance price impacting paid-in capital.
- Market Impact: Bond trading prices fluctuate around par, while stock par values rarely influence market trading prices.
- Legal Role: Par value helps establish obligations and protects creditors by defining capital limits.
How It Works
For bonds, par value represents the principal sum the issuer must repay at maturity, serving as the base for coupon payments. For example, a bond with a $1,000 par and a 5% coupon pays $50 annually, regardless of its current trading price.
Stock par value is largely symbolic, often set low to minimize liability. When issuing shares above par, companies record the excess as additional paid-in capital, supporting shareholder equity without affecting market performance.
Examples and Use Cases
Understanding par value is crucial across various financial instruments and industries.
- Corporate Bonds: Many companies issue bonds with $1,000 par value, influencing interest payments and redemption. For instance, a Delta bond would repay par at maturity regardless of market price.
- Dividend Stocks: Preferred stocks often use par to calculate dividends, such as a 6% dividend on a $100 par preferred share, relevant when selecting dividend stocks.
- Startups: New companies set low par values to reduce legal capital requirements while issuing shares at higher prices, increasing paid-in capital.
- Bond ETFs: Investors evaluating fixed income can assess par values within portfolios, as seen in guides on best bond ETFs.
Important Considerations
While par value provides a fixed reference point, market prices for bonds and stocks can deviate significantly. Bond investors should be aware that trading above or below par affects yield but not principal repayment.
For stock issuers, setting an appropriate par value influences legal capital and dividend policies but does not dictate market value. Understanding these nuances helps you navigate investments and corporate finance more effectively.
Final Words
Par value sets the baseline for bond repayment and coupon calculations, while for stocks, it mainly serves legal and accounting functions with little market impact. Review your bond holdings to understand how par value influences your expected returns and risk exposure.
Frequently Asked Questions
Par value is the fixed nominal amount assigned to a stock or bond at issuance. It remains constant regardless of market fluctuations and is stated on the security certificate.
For bonds, par value represents the principal amount the issuer must repay at maturity. It also serves as the base for calculating coupon interest payments, like a $1,000 bond with a 5% coupon paying $50 annually.
Bonds can trade at a premium (above par) or discount (below par) depending on interest rate environments. Despite this, the issuer repays the full par value at maturity, protecting bondholders.
Par value for stocks is a nominal minimum price set at issuance, often very low, and mainly serves legal and accounting purposes. It typically doesn't affect the stock's market price or trading.
Common stock usually has a low par value, like $0.01 or $1, mainly for legal reasons, while preferred stock often has a higher par value which can set the base for fixed dividend payments.
Yes, some states allow no-par-value stock, which simplifies accounting and removes the legal minimum issuance price requirement.
Par value guarantees that bondholders will be repaid the principal amount at maturity, regardless of bond price fluctuations, helping protect their investment.
When shares are issued above par value, the excess amount is recorded as additional paid-in capital, which represents the money received beyond the nominal par value.
