Par Value

Par value is the minimum value of a security set and stated in the corporate charter or its certificate by the issuer when issued for the first time. It is also known as face value and nominal value.

It is one of the characteristics of securities like bonds and stocks. However, it is not attributable to all categories of securities, and even companies issue no-par stocks. Furthermore, some countries like Australia abolished the application of par value regimes to prevent its shortcoming from happening.

• The par value of a security is the minimum value declared in the company charter or its certificate by the issuers when issued for the first time. It is also referred to as face value or nominal value.
• Face value of the stock refers to the value per share mentioned in the corporate charter.
• Bonds have a predetermined face value. A bond certificate shows the amount of money the issuer promises to repay bondholders when they reach maturity.
• A $1000 bond with a 3% coupon indicates that the face of the bond is $1000, and the coupon rate is 3%.

Par value of securities issued is meant to highlight organizations' real or minimum value and discloses the capitalization target to be satisfied through the issue of securities. The process of assigning face value protects creditors and fixes the maximum liability of shareholders.

It can be imagined as a fixed central node, and the market prices circulate. The market price may fluctuate above or below the face value forced by market forces and the economic environment. However, events like stock split can reduce the face value but are balanced by increased shares.

For new companies and startups, the par value of shares plays a critical role in conveying the company's growth and financial performance. Having a face value assures investors that the securities like stocks will be traded at or above par, not below par.

Par value of shares refers to the face value of the stocks, the value per share stated in the corporate charter. Also, it is the price determined by the company to go for IPO. The issue price is generally the sum of face value and premium amount. Stakeholders can read the par value of common stock and preferred stocks from the stockholder's equity section of the balance sheet or other documents like the 10-K form. For example, the face value of Netflix, Inc. is $0.001.

A share doesn't need to have a face value. There are no par stocks, and the concept is not very relevant in the stock market because it does not influence stock prices. However, based on legislation in many states, a stock cannot be traded below its face value. So, companies usually set a minimum amount as face value.

Bonds have a par value. A bond certificate highlights the value the issuers promise to repay to bondholders at maturity, i.e., maturity value. It is the predefined amount determined by bond issuers when they first issue the financial instrument as its basic value, and this price will not fluctuate. However, when it reaches the open market, the investors may spend a price higher or lower than the face value to obtain it based on market scenario and interest rate fluctuations.

The difference between bond coupon rate and market interest rate discloses whether the bond is trading at par, below, or above par. If the bonds are issued at par, the issuer gets the face value; if it is issued below par (at a discount), the issuer receives a price less than the face value, and if it is issued above par (at a premium), the issuer gets a price greater than the face value of the bond. Finally, whether it is issued below or above par, the bond owner gets face value at its maturity.

Let's look into an example indicating the relevance of face value. An investor bought a $1000 bond with a coupon rate of 10% paying interest semi-annually. It demonstrates that the bondholder owns a bond with a par value or face value of $1000. Furthermore, the investor will receive the face value as principal when the investment reaches its maturity apart from the semi-annual interest income. Of course, the market price of a bond may vary. However, the principal amount received by the bondholder at maturity will not change; it will be the fixed face value denoted at the time of issue.

Par value and face value refer to the same thing. It denotes the minimum stock price set by the issuers and listed in the corporate charter. It is significant in the calculation of the cost of financial instruments. For example, it's the face value paid as the principal to bondholders at maturity, and dividend calculations are based on the face value of stocks.

This has been a guide to Par Value and Meaning. Here we discuss the par value of stocks and bonds and their differences, along with examples. You may also learn more about financing from the following articles –

• Net Asset Value
• Value Investing
• Fair Value Accounting