## What is 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.

## 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).

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. Most bonds are issued at par value, but this is not always the case. On secondary markets, bonds will often trade above (at a premium) or below par (at a discount). When this happens, annual coupon payments do not change; the bondholder still receives \$50 per year so long as the issuer does not default. However, the bonds will be redeemed at full face value.

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, making it a hybrid security. 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 shareholders' 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 balance sheet listed its common stock as \$16.6 million in 2015, 2016, and 2017; the company's market capitalization was around \$125.75 billion on February 28, 2018, 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 matters 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).