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What Is Par Value?

Par value, otherwise known as face value, is the price of a bond or stock as indicated on the certificate. Par value tends to be more important when investing in bonds versus stocks.

They can be traded above par or below par depending on several different factors. In the United States, there are state regulations that must be followed by companies when setting par value amounts for their stocks.  

Why Is Par Value Important?

Par value becomes important, as it is a pricing benchmark for stocks and bonds. Factors, such as interest rates and maturity dates, can affect the price of the bond when it is traded. For stocks, this value is important because it is a set minimum amount that the stock can be traded for. Meaning, a stock cannot be traded for anything less than its par value.  

What Uses Par Value?

This value is typically used when investing in or trading bonds and stocks. It is an important value to understand when looking to invest in bonds. Also, it becomes important when companies are looking to issue stocks to investors. Let’s review what par value means in terms of bonds and stocks. 

What Is the Par Value of Bonds?

A bond is essentially a loan from an investor to a company or government entity. They are used to raise money to finance projects, refinance existing debts, or to simply maintain operations. The par value of a bond is the price of the bond when it was first issued. Depending on interest rates, your bond may fluctuate with the market. However, this value will always remain the same. 

How To Find the Par Value of Bonds

As mentioned above, the face value of a bond is the price of the bond when it is first issued. Let’s review an example of how to find par value of a bond and how to calculate the amount received per year of the bond. 

Let’s say company XYZ issues a bond with par value of $5,000. That amount will be listed on the certificate and will be the amount that is paid back by the company once the bond matures. Let’s say the investor is loaning the money to XYZ for 5 years, with a coupon rate of 5%. This means that the interest paid to the investor will be $250 annually over 5 years. XYZ will repay the total $5,000 at the end of the 5 year date.   

What Is the Par Value of Stocks?

This value has a slightly different meaning when it comes to stocks. The par of a stock is the minimal amount that a share can be sold at. This means a company cannot sell shares of stock below the issued par value price. In the US, each state can have different requirements as to what amount a company can set as its par for shares. 

Many companies will set a minimal par value in order to meet these requirements. For example, a company may set the par of their stock at $0.001. They cannot sell shares of stock below that price. Some states allow companies to set no par value for shares. This means there is no minimum value assigned to the stock. 

How To Find the Par Value of Stocks

The par value of a stock is listed on the front of the certificate. In today’s world, the par of a stock has lost much of its importance. However, it is still beneficial to know. It is the face value or stated value of the stock.

If a stock is listed as $50/share, the par value is $50. This means that if an investor wanted to purchase 1,000 shares of stock at $50/share, they would be investing $50,000. 

Coupon Rate & Par Value

The coupon rate is an important value when investing and trading bonds. It can help determine if a bond will trade below, above or at par.

A coupon rate is the rate of interest paid by the issuers of a bond based on the bond’s par value. It will stay the same no matter what happens within the market. This means that if a bond has a face value of $1000 and a coupon rate of 5%, the issuers of the bond will pay out $50 a year until the bond’s maturity date.  

What Does a High Value Mean?

Let’s use the above example to determine a high par value. If the interest rate decreases to 4%, the bond would trade above par, as the 5% bond becomes more valuable than the market rate. If a bond is trading above par, investors will be paying more for the bond. However, it will be expected to return a higher yield.  

What Does a Low Value Mean?

Low par value is also referred to as below par. Again, using the above example, let’s assume the coupon rate is 5%. The interest rate in the market increases to 6%. This means the bond would be trading below par and would be less valuable within the market. It’s considered to be trading at a discounted value. 

Does Par Value Include Interest?

The simple answer to the question of whether par value includes interest, is yes. Bondholders will receive periodic payouts based on the coupon rates that were determined upon acquiring the bond.

Using the interest rates within the market and comparing them to the interest payments, or coupon rate, help to determine whether a bond is going to trade at, above, or below par. 

Difference Between Par and Face Value

Face value is also referred to as par value. In financial terms, face value is the monetary value of a stock or bond. These terms are often interchangeable.

However, when dealing with trading bonds, you may more often hear of the term par. A stock’s face value is the initial cost to purchase the stock. A bond’s face value is the total amount expected to be paid back to the investor at the maturity date of the bond. 

Bottom Line

While par value may be less important when looking to invest in stocks, it is important to understand the par value of a bond. Interest rates within the market can help determine whether the bond you have invested in will trade at, above, or below par value. 

Reaching out to a financial advisor can help you to understand par value and how it is associated with the investments you are looking to make. A skilled financial advisor can help guide you with making the appropriate investments that will work best for you and your future.