The term at par means at face value. A bond, preferred stock, or other debt instruments may trade at par, below par, or above par.
Par value is static, unlike market value, which fluctuates with market demand and interest rate fluctuations. The par value is assigned at the time the security is issued. When securities were issued in paper form, the par value was printed on the face of the security, hence face value.
Understanding At Par
Due to the constant fluctuations of interest rates, bonds and other financial instruments almost never trade exactly at par. A bond will not trade at par if current interest rates are above or below the bond's coupon rate, which is the interest rate that it yields.
- Par value is the price at which the bond was issued.
- Its value then fluctuates based on prevailing interest rates and market demand.
- The owner of a bond will receive its par value at its maturity date.
A bond that was trading at par would be quoted at 100, meaning that it traded at 100% of its par value. A quote of 99 would mean that it is trading at 99% of its face value.
A New Bond
When a company issues a new bond, if it receives the face value of the security the bond is said to have been issued at par. If the issuer receives less than the face value for the security, it is issued at a discount. If the issuer receives more than the face value for the security, it is issued at a premium.
The coupon rate, or yield, for bonds, and the dividend rate for preferred stocks, have a material effect on whether new issues of these securities are issued at par, at a discount, or at a premium.
Common stocks have a par value, usually a penny a share. This is an anachronism and has no relationship with its market value.
A bond that trades at par has a yield equal to its coupon. Investors expect a return equal to the coupon for the risk of lending to the bond issuer.
Example of At Par
If a company issues a bond with a 5% coupon, but prevailing yields for similar bonds are 10%, investors will pay less than par for the bond to compensate for the difference in rates. The bond's value at its maturity plus its yield up to that time must be at least 10% to attract a buyer.
If prevailing yields are lower, say 3%, an investor is willing to pay more than par for that 5% bond. The investor will receive the coupon but have to pay more for it due to the lower prevailing yields.
Par Value for Common Stock
Par value for common stock exists in an anachronistic form. In its charter, the company promises not to sell its stock at lower than par value. The shares are then issued with a par value of one penny. This has no effect on the stock's actual value in the markets.