Par value is the face value, also known as the nominal value, of a share of stock or a bond. The amount is set by the issuer of the security and remains the same for the life of the asset. The issuer could be a corporation, government, or municipality.
Par value is set for bonds, common stock, and preferred stock, but its effect on the different securities works in different ways. To find the par value of a security, you can look at a business’s corporate charter, or it will be listed on a physical bond or stock certificate. You can also find it by looking at the shareholders’ equity section of a company’s annual report.
In this article, we’ll discuss what par value means for different assets, how this differs from an asset’s “real” value, and what this means for investors.
What is par value?
What par value actually is, and what it means in the world of investing, can be very different. When an entity, such as the government or a corporation, issues a bond or a stock, they assign it a value. That is the par value. In many cases, it doesn’t bear much relation to its value in the real world.
Par value is the minimum price that a stock or bond can be sold for. In the case of stock shares, the par value has nothing to do with the market price of the asset—what it would buy and sell for on the secondary market. Anyone who’s ever looked at a stock market ticker knows that market values fluctuate wildly. A bond’s par value, on the other hand, has a much closer relationship to its actual or “real” value in the marketplace.
Buying a bond from an issuer is essentially lending them money for a specified period of time, with the bond issuers’ promise to repay it when the bond matures. Bonds are fixed-income securities, meaning they are debt instruments that pay investors back at a fixed interest rate.
To determine whether a bond will trade at, below, or above par, the market interest rate is compared to the bond’s coupon rate. The coupon rate determines a bond’s interest payments (or coupon payments), which are usually made twice a year.
What is par value in bonds?
Unlike trading shares, where market stock value changes often, the par value of a bond is the amount of money that bond issuers promise to repay to the bondholder at the maturity date. The par value also determines the bond’s fixed interest rate, which the bond issuer must pay over the lifetime of the bond in addition to the initial investment (also called the principal).
The principal you pay may or may not be the par value of the bond because they are often sold at different prices on the secondary market. This is due to factors such as the level of interest rates and the bond’s credit status.
If it’s sold at more than par value (above par), the bond is sold at a premium and your effective interest rate is lower. If it’s sold at less than par value (below par), it’s considered a discount bond and your effective interest rate would be higher.
Let’s say you bought a $1,000 bond from an issuer with a coupon rate of 5%. That means you would make $50 a year.
Now let’s say you bought that same bond on the secondary market for $1,050. You would still make $50 a year, but your effective interest rate would be about 4.7%. This means the bond is sold at a premium. If you bought it for $950 as a discount bond, your interest rate would effectively be 5.3%.
What par value means for bond investors
When a bond matures, it only pays back the par value — not what you actually paid for it on the market. This means some bonds are a better investments than others. Whether it’s a good deal or not depends upon the price you paid for the bond, its coupon rate, and the length of time to achieve its maturity value.
To figure this out, investors can calculate the bond’s yield-to-maturity (YTM), which shows how much you’d earn from the time you bought it to when it reaches its maturity date. YTM factors into the bond’s market price, par value, and any interest you make along the way.
The bottom line is if the YTM is higher than the coupon rate, you’d make more money keeping the bond until it matures than if you paid par value. If the YTM is lower, the opposite is true.
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What is par value in stocks?
Par value or face value for stocks is a completely different animal compared to bonds. The stock’s assigned face value is essentially an arbitrary amount, which is sometimes meaningless but can be used to calculate dividends for preferred stock. Nevertheless, the par value will be printed on the physical stock certificates or can be found in the shareholder’s equity section of a company’s balance sheet.
Some states don’t even require stocks to have a par value. For those that do, the par value means a stock (a share of ownership) cannot be sold for less than that amount. Most companies, particularly large corporations, assign par values in mere pennies or fractions of pennies. For example, the par value of Coca-Cola is $0.25, Amazon is $0.01, and Google (Alphabet Inc.) is $0.00001.
One of the reasons for this is so that corporate founders and early investors can buy up substantial amounts of shares without using a ton of capital. It’s also a way to get around state regulations that require a company to assign a par value—a practice that’s often viewed as antiquated.
Corporations with common stock—shares that don’t usually pay dividends—may have somewhat higher par values, say $1, partly as a way to value the company. If the company issues one million shares and sell shares at $1, the company is said to be valued at $1 million. Basically, the market value of shares, meaning the dollar value you pay for stocks on an exchange, bears no resemblance to its face value.
Par value for preferred stock vs. common stock
The main difference between preferred stock and common stock is that preferred stock pays dividends to investors, much like bonds make regular interest payments to investors. However, dividends are actually a share of the profits and retained earnings of a company.
Some common stocks pay dividends too, but it’s not as common and isn’t tied to the par value (rather, it’s often just a dollar amount assigned to each share). Plus, dividends are often suspended if the company isn’t doing well. Dividends for preferred stocks aren’t guaranteed either but are much less likely to be waived.
Similar to bond interest payments, dividends for preferred stocks are listed as a percentage amount, also known as a coupon rate. That coupon rate is then divided by the stock’s par value to calculate the dividend.
For example, if you bought newly issued stock with a par value of $50 and a 5% coupon rate, you would get $2.50 per share. Then, if you bought it on the secondary market for $100, you would still get $2.50 per share but the effective lower interest rate would be 2.5%.
- The par value of a bond, often $1,000, $500, or $100, is the amount an original bond issuer must sell the bond for.
- On the secondary market, bonds are usually sold for more or less than par value.
- When an investor buys bonds, they come with fixed interest rates that are typically paid out in two yearly interest payments.
- Par value for stocks indicates the lowest legal amount a share of stock can be sold for.
- The par value of shares often has no relationship to the market value of a share—shares can be sold for whatever the market will bear.
- Par value is used for calculating dividends for preferred stocks.
View Article Sources
- Long-Term Government Bond Yields — FRED Economic Data
- Treasury Bonds: Rates & Terms — TreasuryDirect
- What Is Face Value? Definition and Examples — SuperMoney
- Beginner’s Guide to Investing — SuperMoney
- What is a Stock Float? Examples of High Vs. Low — SuperMoney
- Bullish vs. Bearish Markets — SuperMoney
- What is a Dead Cat Bounce in Stock Investing? — SuperMoney
- What is a Bull Trap in Stock Market Investing? — SuperMoney
- Bear Trap: Stock Market Investing for Beginners — SuperMoney
- Best Online Brokers for Stock Trading in 2022 — SuperMoney