Loading the player...

What is 'Par Value'

Par value is the face value of a bond. 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. 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.

Par value for a share refers to the stock value stated in the corporate charter. Shares usually have no par value or very low par value, such as 1 cent per share. In the case of equity, par value has very little relation to the shares' market price.

Par value is also known as nominal value or face value.

BREAKING DOWN 'Par Value'

Par Value of Bonds

One of the most important characteristics of a bond, is its par value. The par value is the amount of money that bond issuers promise to repay bondholders at the maturity date of the bond. A bond is essentially a written promise that the amount loaned to the issuer will be repaid.

Bonds are not necessarily issued at their par value. They could also be issued at a premium or at a discount depending on the level of interest rates in the economy. A bond that is trading above par is said to be trading at a premium, while a bond trading below par is 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. For example, a bond with a face value of $1,000 that is currently trading at $1,020 will be said to be trading at a premium, while another bond trading at $950 is considered a discount bond. 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.

The coupon rate of a bond as compared to the interest rates in the economy determines whether a bond will trade at par, below par, or above its par value. The coupon rate is the interest payments that are made to bondholders, annually or semi-annually, as compensation for loaning the issuer a given amount of money. For example, a bond with par value of $1,000 and a coupon rate of 4% will have annual coupon payments of 4% x $1,000 = $40. A bond with par value of $100 and a coupon rate of 4% will have annual coupon payments of 4% x $100 = $4. If a 4% coupon bond is issued when interest rates are 4%, the bond will trade at its par value since both interest and coupon rates are the same.

However, if interest rates rise to 5%, the value of the bond will drop, causing it to trade below its par value. This is because the bond is paying a lower interest rate to its bondholders compared to the higher interest rate of 5% that similar-rated bonds will be paying out. The price of a lower-coupon bond therefore must decline to offer the same 5% yield to investors. On the other hand, if interest rates in the economy falls to 3%, the value of the bond will rise and trade above par since the 4% coupon rate is more attractive than 3%.

Regardless of whether a bond is issued at a discount or premium, the issuer will repay the par value of the bond to the investor at the maturity date. Say, an investor purchases a bond for $950 and another purchases the same bond for $1,020. On the bond's maturity date, both of the investors will be repaid $1,000 par value of the bond.

While the par value of a corporate bond is usually stated as either $100 or $1,000, municipal bonds have par values of $5,000 and federal bonds often have $10,000 par values.

Par Value of Stocks

Some states require that companies cannot sell shares below the par value of these shares. To comply with state regulations, most companies set a par value for their stocks to a minimal amount. For example, the par value for shares of Apple, Inc. is $0.00001 and the par value for Amazon stock is $0.01. Shares cannot be sold below this value upon initial public offering - this way, investors are confident that no one is receiving a favorable price treatment.

Some states allow the issuance of a stock with no par value. For these stocks, there is no arbitrary amount above which a company can sell. An investor can identify no par stocks on stock certificates as they will have "no par value" printed on them. The par value of a company's stock can be found in the Shareholders' Equity section of the balance sheet.

 

RELATED TERMS
  1. At Par

    At par is a term that refers to a bond, preferred stock or other ...
  2. Pull To Par

    Pull to par is the movement of a bond's price toward its face ...
  3. Face Value

    Face value is the nominal value or dollar value of a security ...
  4. Above Par

    Above par is a term used to describe the price of a bond when ...
  5. Bond Valuation

    Bond valuation is a technique for determining the theoretical ...
  6. Dollar Price

    Dollar price is a method of pricing a bond in value terms, not ...
Related Articles
  1. Investing

    Simple Math for Fixed-Coupon Corporate Bonds

    A guide to help to understand the simple math behind fixed-coupon corporate bonds.
  2. Investing

    6 Ways That Investors Use Bonds

    Learn how the stodgy stereotype of bonds can overshadow the basic and advanced uses of what these investments can do for your portfolio.
  3. Investing

    The Basics Of Bonds

    Bonds play an important part in your portfolio as you age; learning about them makes good financial sense.
  4. Investing

    4 basic things to know about bonds

    Learn the basic lingo of bonds to unveil familiar market dynamics and open to the door to becoming a competent bond investor.
  5. Investing

    Six biggest bond risks

    Bonds can be a great tool to generate income, but investors need to be aware of the pitfalls and risks of holding corporate and/or government securities.
  6. Investing

    Corporate Bonds: Advantages and Disadvantages

    Corporate bonds can provide compelling returns, even in low-yield environments. But they are not without risk.
RELATED FAQS
  1. How Is Par Value Affected When a Bond Price Falls?

    When you buy a bond, the interest payable is known as the par value of the bond. Find out how the par value is affected when ... Read Answer >>
  2. Par value vs market value

    Learn about the difference between the par value and market value of financial securities, including the role they play in ... Read Answer >>
  3. Par Value vs Face Value

    Learn about the par value and face value of securities as well as what these synonymous terms mean about the value and purchase ... Read Answer >>
  4. Current yield vs yield to maturity

    Learn about the relationship between a bond's current yield and its yield to maturity, including how the market price of ... Read Answer >>
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  3. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  4. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  5. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  6. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
Trading Center