The term PAR refers to the face amount or stated value of a negotiable instrument, stock, or bond. It is a financial concept denoting that an instrument is valued at its nominal or original value, rather than the price it might obtain in the market.
Definition of Par Value
Par Value is defined as the explicit value assigned to a financial instrument by the issuer. For stocks, it is the minimum price at which shares can be issued, whereas for bonds and other debt instruments, it represents the amount to be repaid at maturity.
Key Points:
- Nominal Value: The face value stated on the instrument.
- Comparative Value: Distinction between par value and market value.
- Exchange Standard: Bills of exchange, stocks, and similar instruments are considered at par value when they trade at their stated value.
Types of Financial Instruments with Par Value
Stocks
- Common Stocks: Often have a low par value, sometimes even zero.
- Preferred Stocks: Usually have a higher par value since it determines the dividend.
Bonds
- Government Bonds: Stipulated par value indicates the amount to be repaid at maturity.
- Corporate Bonds: Similar to government bonds, but issued by corporations.
Bills of Exchange
- Represent short-term negotiable instruments that can trade at or around their par value.
Special Considerations
Par vs. Market Value
PAR value is the nominal or stated value, not reflecting the price at which an asset is currently trading in the market.
- Below Par: If the market value is less than par value, the instrument trades at a discount.
- Above Par: If the market value is more than par value, the instrument trades at a premium.
Examples
- Stock Example: A stock with a par value of $1 might sell in the market for $50.
- Bond Example: A bond with a par value of $1,000 might sell for $980 if the interest rate rises, indicating it is below par.
Historical Context
The concept of PAR value has historical roots as it was initially used to protect investors by ensuring a minimum price level for shares.
Applicability in Financial Decisions
Understanding PAR values is crucial for investors in determining the intrinsic worth of an instrument compared to its market performance.
- Investment Strategies: Buy at a discount, sell at a premium.
- Dividend Calculations: Especially for preferred shares with fixed dividend rates.
Comparisons
- PAR Value vs. Market Value: Par value is fixed; market value can fluctuate.
- Par Price vs. Face Value: Terms often used interchangeably, face value is more common in bond contexts.
Related Terms
- Face Amount: Another term for par value, especially in bond markets.
- Issue Price: The initial price at which the instrument is sold.
- Maturity Value: The amount paid back to bondholders at maturity, often the same as par value.
FAQs
Q1: Can common stock have no par value?
A1: Yes, many modern common stocks are issued with no par value to avoid restrictions based on price.
Q2: Is the dividend on preferred stock calculated based on its par value?
A2: Yes, dividends for preferred stocks are typically a percentage of the par value.
Q3: What does it mean when a bond is selling at a discount?
A3: It means the bond is trading below its par value, indicating higher yields or increased credit risk perception.
References
- Investopedia, “Par Value”
- Financial Accounting Standards Board (FASB) definitions and guidelines.
- Historical financial instruments records.
Summary
PAR value is a foundational concept in finance representing the original or face value of stocks, bonds, and other negotiable instruments. Understanding the distinction between par value and market value helps investors make informed decisions about their investment strategies and assess the intrinsic worth of financial instruments.
