Par Value

AAA

DEFINITION of 'Par Value'

The face value of a bond. Par value for a share refers to the stock value stated in the corporate charter. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. Par value for a bond is typically $1,000 or $100. Shares usually have no par value or very low par value, such as 1 cent per share. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit status. In the case of equity, par value has very little relation to the shares' market price.

Also known as nominal value or face value.

INVESTOPEDIA EXPLAINS 'Par Value'

For example, a bond with par value of $1,000 and a coupon rate of 4% will have annual coupon payments of $40. A bond with par value of $100 and a coupon rate of 4% will have annual coupon payments of $4.

One of the main factors that causes bonds to trade above or below par value is the level of interest rates in the economy, as compared to the bonds’ coupon rates. A bond with a 4% coupon will trade below par if interest rates are at 5%. This is because in such a scenario, investors have a choice of buying similar-rated bonds that have a 5% coupon. The price of a lower-coupon bond therefore must decline to offer the same 5% yield to investors. Likewise, a bond with a 4% coupon will trade above par if interest rates are at 3%.

A bond that is trading above par is said to be trading at a premium, while a bond trading below par is regarded as trading at a discount. During periods when interest rates are low or have been trending lower, a larger proportion of bonds will trade above par or at a premium. When interest rates are high, a larger proportion of bonds will trade at a discount.

If an investor buys a taxable bond for a price above par, the premium can be amortized over the remaining life of the bond, offsetting the interest received from the bond and hence reducing the investor’s taxable income from the bond. Such premium amortization is not available for tax-free bonds purchased at a price above par.

VIDEO

Loading the player...
RELATED TERMS
  1. Market Discount

    The difference between a bond's stated redemption price and its ...
  2. Accrued Market Discount

    The gain in the value of a discount bond expected from holding ...
  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. Baby Bond

    Fixed income securities issued in small denominations, generally ...
RELATED FAQS
  1. What is the safest investment?

    Due to the variety of options on the market and the unpredictability of the economic climate, it is difficult to identify ... Read Full Answer >>
  2. What are some examples of preferred stock, and why do companies issue it?

    There are several reasons why a company chooses to offer preferred stock, all of which relate to the financial advantages ... Read Full Answer >>
  3. How does preferred stock differ from company issued bonds?

    Preferred stock is a special kind of equity ownership, while bonds are a common form of debt issue. Many consider preferred ... Read Full Answer >>
  4. What are the components of shareholders' equity?

    Investors and corporate accounting professionals analyze shareholders' equity to determine how a company is using and managing ... Read Full Answer >>
  5. What is face value and how is it determined?

    Face value is defined as "the nominal value or dollar value of a security stated by the issuer." It is determined by the ... Read Full Answer >>
  6. What determines the price of a bond in the open market?

    One of the most basic concepts that investors should become familiar with is how bonds are priced. Bonds do not trade like ... Read Full Answer >>
  7. How is the Social Security trust fund invested?

    The Social Security trust fund is an account held with the U.S. Treasury Department. The federal government uses it to record ... Read Full Answer >>
  8. What does it mean when a bond is selling at a premium? Is it a good investment?

    When the terms premium and discount are used in reference to bonds, they are telling investors that the purchase price of ... Read Full Answer >>
  9. If the price of the bond falls, does that mean the company won't pay me the par value?

    When you buy a bond, you are loaning money to the issuer. Because a bond is a loan, the interest paid to the bondholder is ... Read Full Answer >>
  10. Why would a stock have no par value?

    People often get confused when they read about the "par value" for a stock. One reason for this is that the term has slightly ... Read Full Answer >>
Related Articles
  1. Investing Basics

    What is Par Value?

    Par value is a term used for investments that means original value. It’s also called face value or nominal value.
  2. Investing Basics

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  3. Options & Futures

    Callable Bonds: Leading A Double Life

    Find out more about these dangerous and exciting cousins to regular bonds.
  4. Bonds & Fixed Income

    Retail Notes: A Simpler Alternative To Bond Funds

    These securities are meant to be held until maturity, removing the burden of complex pricing that sometimes plagues bonds.
  5. Bonds & Fixed Income

    Advanced Bond Concepts

    Learn the complex concepts and calculations for trading bonds including bond pricing, yield, term structure of interest rates and duration.
  6. Bonds & Fixed Income

    How to Diversify with Muni Bond ETFs

    Thinking of diversifying with bonds? Consider these muni bond ETFs.
  7. Bonds & Fixed Income

    Should Junk Bond ETFs Be a Part of Your Portfolio?

    Should junk bonds be a part of your portfolio? Here's what you need to know.
  8. Mutual Funds & ETFs

    How To Build A Bond Ladder?

    Bond laddering is a strategy used when building a portfolio: an investor can spread out interest rate risk and create a stream of cash flows for income.
  9. Investing Basics

    Explaining Interest Rate Risk

    Interest rate risk is the risk that investments already held will lose market value if new investments with higher interest rates enter the market.
  10. Investing Basics

    What is an Asset Class?

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.

You May Also Like

Hot Definitions
  1. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  3. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase ...
Trading Center