Par

DEFINITION of 'Par'

Short for "par value," par can refer to bonds, preferred stock, common stock or currencies, with different meanings depending on the context. Par most commonly refers to bonds, in which case it means the face value, or value at which the bond will be redeemed at maturity. This is usually $1,000 for corporate issues and can be more for government issues. A bond can trade above or below par, reflecting the broader interest rate environment and the issuer's perceived credit worthiness. 

BREAKING DOWN 'Par'

Bonds

In its most common usage, par value applies to bonds. The term refers to the face value of the bond, that is, the value at which the issuer will redeem the bond at maturity (assuming it does not default). Most bonds are issued at par value, but this is not always the case: discount bonds can be issued below par value, but must be redeemed at that value. Par value for corporate bond issues is usually $1,000. Government issues can have higher par values. 

The coupon rate of a bond is calculated using the par value. For example, a bond with a par value of $1,000 with a coupon rate of 5% will pay $50 a year ($1,000 * 0.05 = $50). The coupon rate is distinct from the bond's yield, which fluctuates according to the bond's price. On secondary markets, bonds will often trade above (at a premium) or below par (at a discount). When this happens, annual payments do not change; the bondholder still receives $50 per year so long as the issuer does not default.

If markets begin to question the issuer's credit worthiness, the bond price may fall to $800, a 20% discount to its par value. It will still pay $50 a year, and its coupon rate will remain 5%, but its yield will be 6.25% ($50 ÷ $800 = 0.0625). Bonds' prices and yields move in opposite directions. A bond can also trade above or below par value for external reasons. If the prevailing interest rate at issue was 5%, but rose to 6.25% soon after, the market would likely adjust the price of the bond to $800 to make its yield competitive.

When referring to bonds, nominal value is synonymous with par value.

Preferred Stock

Preferred stock is equity, but bears similarities to a debt instrument. Preferred stock holders have priority over common shareholders when it comes to claiming a bankrupt company's assets, though bond holders have priority over them. Preferred stock generally pays higher dividends, which must be paid in full before common stock holders can receive theirs; the trade-off is that preferred shares lack voting rights.

Par value has a similar meaning for preferred stock as it does for bonds. Some issues are callable, meaning the company can repurchase them at par value after a certain date. Dividends are set in terms of the stock's par value, though some issues' dividends track a benchmark. If a preferred stock issue trades at a premium or discount to par, the implications are much the same as they are for bond issues.

Common Stock

Unlike bonds and preferred stock, the par value of common stock (also known as ordinary shares) has no bearing on its market value. Increasingly, common stock issues have no par value. When they do, it is often just $0.01. Par value is the minimum legal amount of shareholder equity a company must maintain, meaning that dividend payments cannot reduce it below that level. This requirement afforded a level of protection to creditors when markets were unregulated, but is now largely meaningless. For example, McDonald's Corp's (MCD) balance sheet listed its common stock as $16.6 million in 2012, 2013 and 2014; the company's market capitalization was recently (October 2015) around $97 billion, and has fluctuated a great deal in recent years without affecting the par value-based common stock account.

The par value of common stock can affect a company's tax treatment. It also matter for callable common stock, which is relatively rare.

Currencies

For currencies, "par" means equal value. If a government decides to issue a new currency, they may issue it at par to the old one, that is, at a 1-to-1 exchange rate. The term can also refer to pegged currencies: the Cuban convertible peso (CUC), one of the country's two official currencies, is nominally pegged to the U.S. dollar at a 1-to-1 exchange rate, though a 10% tax is applied to dollar conversions (other currencies are exempt).

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Baby Bond

    Fixed income securities issued in small denominations, generally ...
  3. Face Value

    The nominal value or dollar value of a security stated by the ...
  4. Full Stock

    A stock with a par value of $100 per share. A full stock issue ...
  5. Original Issue Discount - OID

    The discount from par value at the time that a bond or other ...
  6. Maturity Date

    The date on which the principal amount of a note, draft, acceptance ...
Related Articles
  1. Retirement

    Bond Basics Tutorial

    Investing in bonds - What are they, and do they belong in your portfolio?
  2. Investing News

    Bill Gross: It's a Xanax Existence for the 99%

    Read about the investment letter from famed bond king Bill Gross for 2016. See how he says the 99% are living a Xanax existence while the 1% prosper.
  3. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  4. Retirement

    Retirees: How to Survive When Interest Rates Drop

    Low interest rates are a portfolio killer if you're living off of investment income. Some strategies for dealing.
  5. Mutual Funds & ETFs

    5 Vanguard Fixed Income Fund Underperformers

    Learn about three Vanguard fixed income mutual funds that underperform compared to their benchmark indexes. Find out why low expense ratios are important.
  6. Mutual Funds & ETFs

    Top 3 Allianz Funds for Retirement Diversification in 2016

    Discover the top three Allianz funds for retirement diversification in 2016, with a summary of the portfolio's managers, performance and risk measures.
  7. Mutual Funds & ETFs

    3 PIMCO Funds Rated 5 Stars by Morningstar

    Learn about three fixed income mutual funds managed by Pacific Investment Management Company (PIMCO) that have received five-star overall ratings from Morningstar.
  8. Investing Basics

    The Pros and Cons of Distressed Debt Investing

    Distressed debt investing is suitable for professional investors. Besides heavy risk factors to consider, this investment type can provide a large ROI.
  9. Investing

    How Rising Interest Rates Affect Junk Bonds

    We examine the impact of rising interest rates on higher-yielding bonds.
  10. Mutual Funds & ETFs

    The 4 Best Fidelity Funds for Income Seekers in 2016

    Discover the four best fixed-income mutual funds administered and managed by Fidelity Investments suitable for income-seeking investors.
RELATED FAQS
  1. What is a basis point (BPS)?

    A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial ... Read Full Answer >>
  2. What are the maximum Social Security disability benefits?

    The average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ... Read Full Answer >>
  3. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
  4. Do hedge funds invest in bonds?

    Hedge funds have the freedom to deploy their capital in virtually any manner. They can use leverage, invest in non-publicly ... Read Full Answer >>
  5. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
  6. Do mutual funds pay dividends or interest?

    Depending on the type of investments included in the portfolio, mutual funds may pay dividends, interest, or both. Types ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center