Par value, also known as face value or nominal value, is the value of a financial instrument as stated by the issuer. It represents the nominal or “face” amount that the issuer agrees to pay the bondholder or stockholder.
In the context of bonds, the par value is the amount that a bondholder will receive when the bond matures. It’s also the amount on which the bond’s interest payments are calculated. For example, if a bond has a par value of $1,000 and an annual coupon rate of 5%, the issuer will pay the bondholder $50 per year until the bond matures.
In the context of stock, par value is the nominal value assigned to a share of stock by the issuer. It’s typically set at a minimal amount, such as $0.01 per share, and does not reflect the actual market price of the share. The par value of a company’s shares has no direct connection with the market price of the shares.
It’s important to note that while bonds are often issued at their par value, they can be traded in the market at prices above (at a premium) or below (at a discount) their par value, depending on factors such as interest rates and the issuer’s creditworthiness. Similarly, the market price of a company’s shares will usually be different from the par value of the shares.
Example of Par Value
Let’s take a look at two examples, one for bonds and one for stocks.
Par Value Example with Bonds:
Suppose a corporation issues a bond with a par value of $1,000. This bond has a coupon rate (interest rate) of 5% and will mature in 10 years. If you buy this bond at issuance, you will pay the par value of $1,000. Each year, the corporation will pay you 5% of the bond’s par value in interest, which is $50 (0.05 * $1,000). After 10 years, when the bond matures, the corporation will return the bond’s par value of $1,000 to you.
Please note, if you decide to sell the bond before it matures, the price you receive might be higher or lower than the par value, depending on market conditions.
Par Value Example with Stocks:
Now let’s consider a corporation that issues shares with a par value of $0.01 each. This is a nominal value and does not reflect the price at which the shares will be sold or what they are worth in the market.
If the corporation decides to issue 1,000,000 shares, the total par value of all the shares would be $10,000 (1,000,000 shares * $0.01/share). But when the corporation sells these shares in an initial public offering (IPO) or to private investors, it may sell them for much more than the par value. For example, if the shares are sold for $10 each, the corporation would raise $10,000,000 from the share issuance, even though the total par value of the shares is only $10,000.
The market price of the shares can then fluctuate above or below this issuance price based on the corporation’s performance, investor sentiment, and other market factors.