What is Par Value?
The Par Value is the face value (FV) on the issuance of securities like bonds or stocks, as established on the issuer’s security certificate.
How to Calculate Par Value
The par value of a stock or bond is the stated value on the security certificate of the issuer.
The par value, a term often used interchangeably with the face value (FV), is the nominal value of a share, bond, or other related securities on their date of issuance.
The par value of a bond is its face value, i.e. the principal the issuer is obligated to repay at the end of the bond’s term. The coupon rate earned by a bondholder is calculated as a percentage of the face (par) value.
Unlike the market value – i.e. the price at which the equity or debt securities are trading for in the open market – the par (face) value remains constant and does not fluctuate.
As for stocks, the par value is determined by the board of directors when the shares are issued and is formally stated on the stock certificate.
Par Value of Bonds
The par value represents the amount owed to the bondholders by the issuer of the debt, who is legally obligated to compensate bondholders with coupons and the repayment of principal on the bond’s date of maturity.
By standard convention, the face value of bonds is most often set at $1,000.
For instance, let’s suppose a company issued ten-year bonds at a face value (FV) of $1,000 to the public.
The face value of the bonds is equal to $1,000, which is the amount the issuer must repay in ten years once the bond reaches maturity.
The coupon is also in part set by the face value (FV). Regardless of whether the market price is above or below par, the coupon payments by the bond issuer are dependent on the face value.
But not all bonds are issued at par – for example, discount bonds are issued at a price lower than the par value.
Whether a bond is issued at or trading at a discount, par, and premium to par depends on the current interest rate environment.
- Discount Bond: “Trading Below Par”
- Par Bond: “Trading at Par”
- Premium Bond: “Trading Above Par”
If a bond is selling at par, the bond’s worth when issued and the value at which it is redeemed at maturity are equivalent.
In general, a greater proportion of bonds usually trade above par throughout declining interest rate environments.
Conversely, if the prevailing interest rates are high, more bonds will trade at a discount.
Yield to Maturity (YTM)
The face value (FV) on a bond is particularly important for calculating the yield to maturity (YTM).
Bondholders can calculate the yield-to-maturity (YTM), i.e., the rate of return earned if the bond is held until maturity.
- If YTM is higher than the coupon rate, the bond will likely be held to maturity.
- If the YTM is lower than the coupon rate, it is unlikely for the bond to be held to maturity.
Par Value of Common Stock
For common stock, the par value is mostly considered a formality to satisfy mandated requirements, with one notable provision consisting of the agreement not to sell shares below the par value.
Practically, the par value has nearly zero impact on the current market value of the company’s shares.
Otherwise known as the stated value per share, the par value of a share is the minimum share value at which a company can issue shares to the public.
When a corporation is formed, the articles of incorporation must set a par value for its common stock, which all shareholders must pay to own each share in the newly incorporated company.
The par value is the stated value per share, representing the “floor” price share value below which future shares cannot be issued.
Existing and prospective investors could be assured that the issuer cannot legally sell shares at a price lower than the par value.
Like bonds, there will be a difference between the par value of a stock and the market value.
Apple (AAPL) Common Stock Example
The par value is the minimum price at which a corporation can legally sell its shares, and most are priced below $0.01.
As a real-life example, Apple (NASDAQ: AAPL) has set its common stock’s par value at $0.00001 per share.
Apple Common Stock (Source: AAPL 10-K)
Par Value of Preferred Securities
Typically, common stock is issued and traded far in excess of the par value, but bonds and preferred stock are issued at or near their par value.
For preferred stock, the face value sets the dividend issued on each unit of preferred stock.
Similar to the coupon rate and par value of bonds, corporations issue preferred stock with a dividend rate calculated as a percentage of the face value.
In contrast to common stock, the price of bonds and preferred stock are far more sensitive to the interest rate environment.
If interest rates decline to a level lower than the coupon rate of a bond or the dividend rate of preferred stock, the market price of each should rise (and vice versa if interest rates are higher).
Finally, like the par value of common stock – which is recorded primarily for purposes of accounting and abiding by regulations – the face value on preferred stock has minimal impact on the valuation of the company (and share price).