Par value, also known as nominal value or face value, is the value assigned to a stock or bond in the corporate charter. For stocks, it represents the minimum price at which shares can be issued. For bonds, it is the amount the bond issuer agrees to repay the bondholder at maturity. Understanding par value is crucial for investors and financial analysts alike as it informs various financial decisions and reporting.
Par Value in Stocks
Definition and Significance
In the context of stocks, par value is the stated value per share as specified in the corporate charter. Historically, it set a base price for issuance, although many modern stocks are issued with a very low par value or even without a par value.
Example
For instance, if a company’s charter states that the par value of its common stock is $0.01, each share must be sold for at least this amount.
Par Value vs. Market Value
Par value should not be confused with market value. Market value reflects the price at which stocks are traded in the market, which can be significantly higher or lower than the par value based on market conditions, company performance, and investor sentiment.
No-par Stocks
Some companies issue no-par stocks, meaning there is no par value listed in the charter. This simplifies accounting and avoids legal issues related to stock issuance.
Par Value in Bonds
Definition and Usage
For bonds, par value is the amount that will be returned to the bondholder upon maturity. It is also the benchmark for coupon payments, meaning if a bond has a par value of $1,000 and an annual coupon rate of 5%, the bondholder receives $50 each year.
Example
A corporation issues a bond with a par value of $1,000, a coupon rate of 5%, and a maturity of 10 years. The bondholder receives $50 annually and $1,000 at the end of the term.
Par Value vs. Issue Price
Bonds are often issued at par value, but they can also be issued at a premium or discount, resulting in different yield calculations.
Special Considerations
Legal and Financial Reporting
For stocks, par value has minimal impact today but is still recorded for legal and accounting purposes. For bonds, par value is central to understanding yield calculations and investor returns.
Tax Implications
In most jurisdictions, the nominal value might have limited tax implications. However, the difference between the purchase price and par value can affect the tax liabilities for capital gains or interest income.
Historical Context
The concept of par value dates back to the early days of corporate finance when it was crucial for investor protection. Over time, the significance of par value for stocks diminished due to regulatory and market changes, but it remains essential for bonds.
Comparisons with Related Terms
Market Value
As previously discussed, market value is the current trading price of a stock or bond, influenced by supply and demand factors.
Book Value
Book value is the net asset value of a company calculated from its balance sheet, often used as a valuation metric.
FAQs
Why is par value important?
What is the difference between par value and face value?
Can stocks be issued without par value?
Summary
Par value, while not as crucial for stocks today, still serves as an important foundational concept in corporate finance, especially for bonds. It is the nominal value set by the corporate charter for stocks and the repayment value for bonds. Understanding par value aids in grasping broader financial principles related to securities issuance, valuation, and investment returns.
References
- Brigham, Eugene F., and Joel F. Houston. “Fundamentals of Financial Management.”
- Ross, Stephen A., Randolph W. Westerfield, and Bradford D. Jordan. “Corporate Finance.”
Understanding par value provides a clearer picture of financial instruments and their foundational valuation principles.
