Par value, also known as nominal or original value, represents the face value of a bond or the stated value of a stock certificate as indicated in the corporate charter. It is a static value, distinguishing it from the market value, which fluctuates based on market conditions.
Importance of Par Value
Bonds
For bonds, par value is crucial as it denotes the amount bondholders will receive upon maturity. This amount serves as a benchmark for calculating interest payments. For example, if a bond has a par value of $1,000 and an annual coupon rate of 5%, the bondholder will receive $50 per year in interest.
Stocks
In the context of stocks, par value is often set at a very low amount, sometimes as low as $0.01 per share. It has little bearing on the stock’s market price but is important for accounting and legal purposes. The issuance of stock at par value ensures compliance with corporate regulations concerning share issuance.
Types of Par Value
No-Par Value Stocks
Some companies issue no-par value stocks, meaning the shares do not have a nominal value stated in the corporate charter. This approach allows for greater flexibility in setting the stock price.
Premium Bonds
Bonds that are issued above their par value are known as premium bonds. Investors might pay more than the par value if the bond offers a higher interest rate than current market conditions.
Special Considerations
Legal and Accounting Implications
For corporations, the par value of stock helps determine the company’s legal capital, which is the minimum amount that must be maintained and not returned to shareholders. This safeguard protects creditors by ensuring a base level of financial stability.
Investor Perception
While par value has limited relevance to market trading, understanding it can offer insights into a company’s capital structure and initial public offering (IPO) pricing strategy.
Examples
Bond Example
Suppose you purchase a bond with a par value of $5,000 and an annual interest rate of 4%. You will receive $200 annually in interest (0.04 * $5,000), and at the end of the bond term, you will receive the $5,000 par value.
Stock Example
If a company issues 1,000 shares at a par value of $1 per share, the legal capital of the company will be $1,000. Even if the market price per share rises to $10, the par value remains $1.
Historical Context
The concept of par value originated with the issuance of government bonds in the early financial markets. It was established to provide a clear, predefined amount that would be repayable, adding a level of security and predictability for investors.
Applicability
Understanding par value is essential for both new and seasoned investors, providing clarity on the financial instruments in their portfolios. For businesses, it plays a critical role in maintaining legal capital requirements and adherence to corporate governance norms.
Comparisons
- Par Value vs Market Value: Par value is the face value as stated in a corporate charter or bond document, while market value is the current trading price in the market.
- Par Value vs Book Value: Book value represents a company’s total assets minus its liabilities, whereas par value is a nominal value assigned to a stock share or bond.
Related Terms
- Coupon Rate: The interest rate paid by bond issuers on the bond’s par value.
- Face Value: Another term for par value, especially used in the context of bonds.
- Share Capital: The total par value of all issued shares of a company.
FAQs
What is the difference between par value and market value?
Can par value change for a stock or bond?
Why do some stocks have no par value?
References
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Joshua Rosenbaum and Joshua Pearl.
- “Corporate Finance” by Stephen A. Ross, Randolph W. Westerfield, and Jeffrey Jaffe.
- The U.S. Securities and Exchange Commission (SEC) website on securities.
Summary
Par value, whether for stocks or bonds, serves as a fundamental concept in finance. While it may not always play a significant role in market trading, understanding par value is essential for grasping the intricacies of bond interest calculations, corporate share issuance, and legal capital requirements. This knowledge equips investors and businesses to make informed decisions and maintain compliance with regulatory standards.
