Par Value of Stocks and Bonds Explained

What Is Par Value?

Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate, as stated in the corporate charter. Par value is required for a bond or a fixed-income instrument and shows its maturity value and the dollar value of the coupon, or interest, payments due to the bondholder.

Understanding Par Value

Par value is the face value of a bond and determines a bond or fixed-income instrument's maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and its credit status. The par value for a bond is often $1,000 or $100, the usual denominations in which they are issued.

A share of stock's par value is stated in the corporate charter. Shares usually have no par value or low par value, such as one cent per share. Once defined, it is the lowest limit set to the value of a share of stock. The par value, however, is commonly unrelated to a stock's market price.

Par Value of Bonds

The par value is the amount of money a bond issuer promises to repay bondholders at maturity. Bondholders essentially loan money to the bond issuer.

Bonds can trade at a premium or a discount depending on the level of interest rates in the economy. A bond with a face value of $1,000 trading at $1,020 is trading at a premium, while another bond trading at $950 is considered a discount bond. Whether a bond is trading at a discount or premium, the issuer always repays the par value to the investor at maturity.

A bond's coupon rate determines whether a bond will trade at par, below par, or above par value. The coupon rate is the interest payment made to bondholders, annually or semi-annually, as compensation for loaning the bond issuer money. When market interest rates are lower, bonds trade above par. When market interest rates are higher, bonds trade at a discount.

A bond with a par value of $1,000 and a coupon rate of 4% will have annual interest payments of 4% x $1,000 = $40.

If a 4% coupon bond is issued when market interest rates are 4%, the bond is considered trading at par value since both market interest and coupon rates are equal.

If market interest rates rise to 5%, the value of the bond drops, and the bond will trade below par because the bond is paying a lower interest rate to its bondholders compared to the higher interest rate of 5% of other bonds in the market.

If market interest rates fall to 3%, the value of the bond will rise and trade above par since the 4% coupon rate is more attractive than 3%.

While the par value of a corporate bond is usually stated as either $100 or $1,000, municipal bonds typically have par values of $5,000. Treasury Bills are sold at a discount to par in multiples of $100.

Par Value of Stocks

Some states require that companies set a par value below which shares cannot be sold. To comply with state regulations, most companies set a par value for their stocks to a minimal amount. The par value for shares of Apple (AAPL) is $0.00001, and the par value for Amazon (AMZN) stock is $0.01.

Shares cannot be sold below this value upon initial public offering to reassure investors that no one is receiving preferential price treatment.

Some states allow the issuance of stock with no par value. An investor can identify no-par stocks on stock certificates as they will have "no par value" printed on them. The par value of a company's stock can be found in the Shareholders' Equity section of the balance sheet.

Reasons Companies Set Par Value

There are four main reasons why a company might set a par value. This list mainly considers equities Note that any given company may not experience the same requirements or considerations for having to set a par value.

1. Meeting Legal Requirements: Many jurisdictions have corporate laws that mandate the assignment of a par value to shares upon incorporation. This requirement is designed to ensure that companies have a minimum level of capital. In some states, companies have to set par value as part of issuing stock.
2. Offering Creditor Protection: By setting a floor on the equity capital, par value ensures that there is a base amount of capital that remains within the company. Though companies may not always mean to do this, this actually protects creditors by ensuring that not all of the company’s assets can be distributed as dividends.
3. Setting Investor Perception: Par value, though often set at a nominal amount, can positively influence investor perceptions. The existence of par value can signal to investors that the company is meeting formal and legal standards. If nothing else, this may enhance their confidence in the company’s financial management and stability.
4. Helping Accounting and Financial Reporting: We'll talk more about accounting in a section late, but par value plays a role in accounting. By differentiating the nominal value of shares (par value) from any additional amounts paid by investors (additional paid-in capital), companies can provide a clearer and more detailed picture of their financial health. This distinction may help aid analysts and regulators.

Par Value vs. Market Value

A financial instrument's par value is determined by the institution that issues it. Market value is the current price at which a bond or stock can be traded on the open market and constantly fluctuates as investors buy and sell bonds and shares of stock.

A bond can be purchased for more or less than its par value, depending on interest rates and market sentiment. Because shares of stocks are commonly issued with a par value near zero, the market value is often higher than the par value. Investors count on gains made by the changing value of a stock based on company performance and market sentiment.

Why Par Value Is Important for Investors

Par value is a primary component of fixed-income securities such as bonds and represents the value of a contractual agreement, a loan, between the issuing party and the bondholder. The issuer of a fixed-income security is liable to repay the lender the par value on the maturity date.

Companies issue shares of stock to raise equity, and those that issue par value stocks often do at a value inconsistent with the actual market value. This adjustment allows companies to minimize their and the shareholders’ contractual obligations, as par value carries a binding contract between an organization and its shareholders.

Par Value and Accounting

Par value plays a role in accounting. When a company issues shares, the par value of these shares is recorded in the common stock account on the balance sheet. Any amount received above the par value is recorded in the "additional paid-in capital (APIC) account. Therefore, there are accounting and reporting presentation implications for what the par value is.

For example, if shares with a par value of $1 are sold for $5 each, $1 per share is recorded in the Common Stock account, and the remaining $4 per share is recorded in APIC. This separation helps clearly distinguish between the nominal value of shares and the additional capital contributed by shareholders.

The issuance of par value stock does impact the presentation of the equity section of the balance sheet. Though the ultimate dollar amount isn't impacted, this distinction provides transparency regarding the source of equity capital. While par value does not directly influence dividend payments, it impacts the calculation of legal capital, ensuring that a minimum amount of retained earnings is preserved to meet creditor protection requirements. Therefore, it is important from an accounting perspective that these two amounts are recorded differently. This is also in accordance with GAAP treatment.

For stocks issued with no par value, the total proceeds are credited to the Common Stock account, simplifying the equity classification and eliminating the concept of legal capital associated with par value. Therefore, there is some accounting simplicity with this method, though they may have hurdles that prevent them from being able to do so.

The Bottom Line

Par value is the face value of a bond or the value of a stock certificate stated in the corporate charter. A stock's par value is often unrelated to the actual value of its shares trading on the stock market. Par value is required for a bond or a fixed-income instrument and defines its maturity value and the value of its required coupon payments.