In finance, the term “AT PAR” refers to the condition whereby a security, such as a bond or stock, is traded at its face value, also known as the nominal value. When a security is said to be “at par,” its current trading price is exactly equal to its face value.
Understanding Par Value
Par value is the nominal or face value of a bond, stock, or other security, as stated by the issuer. For bonds, this is typically the amount repaid to the bondholder at maturity. For stocks, par value is a legally mandated minimum price at which shares can be issued, often set at a nominal amount.
Bonds
For bonds, par value – commonly $$1000$ or $$100$ – is the amount the issuer agrees to pay the bondholder at the bond’s maturity date. When a bond trades at par, its market value (current trading price) is equal to its par value.
Stocks
For stocks, par value has become largely symbolic, often set at a minimal amount such as $$0.01$ per share. It does not influence the market price directly but serves legal and accounting purposes.
Historical Context
The term “at par” has historical significance in bond markets and stock exchanges. Historically, bonds were issued with a fixed par value and were traded based on their creditworthiness and prevailing interest rates. Similarly, stocks were also assigned a par value, which impacted initial pricing and dividend calculations.
Applicability
Bond Markets
In bond markets, understanding when a bond is trading “at par,” “above par” (premium), or “below par” (discount) is crucial for investors. It assists them in evaluating the bond’s yield, interest rate risk, and potential profit or loss.
Stock Markets
Although par value in stock markets has largely become nominal, it is still relevant during the issuance of new shares and for legal purposes. Shares may be issued “at par” to denote they are sold at their nominal value, though this is less common today.
Examples
Bond Example: A 10-year bond with a par value of $$1000$ is currently trading at $$1000$. Hence, it is said to be trading “at par.”
Stock Example: A company issues new shares with a nominal par value of $$0.01$ but the shares sell for $$50$ in the market. Although par value doesn’t affect trading price, the issuance price is “at par” if the shares are initially issued at $$0.01$ each.
Related Terms
- Par Value: The face value of a bond or nominal value of a stock.
- Premium: When a bond or stock trades at a price higher than its par value.
- Discount: When a bond or stock trades at a price lower than its par value.
Frequently Asked Questions
What does it mean when a bond is trading “at par”?
It means the bond’s current market price is equal to its face (par) value, indicating that the yield and the coupon rate are aligned with current interest rates.
How does “at par” impact stock issuance?
Though largely symbolic, issuing shares “at par” means they are initially sold at their nominal value, which might be relevant for legal or accounting records.
Can the par value of a stock affect its market price?
Generally, no. Market price is influenced by company performance, investor perceptions, and market conditions, not the nominal par value.
References
- Investopedia, “Par Value”. Link
- The Balance, “What is Par Value?”. Link
- Securities and Exchange Commission, “Par Value of Stocks and Bonds”. Link
Summary
“At par” is a crucial term in securities that denotes trading at face value. While more impactful in bond markets, where it signifies alignment with current interest rates, its relevance in stocks is mainly nominal and legal. Understanding “at par” helps investors make more informed decisions about their investments.
