Par Value of Stocks and Bonds Explained

In any case, the fixed par value is used to calculate the bond’s fixed interest rate, which is referred to as its coupon. When referring to the value of financial instruments, there’s effectively no difference between par value and face value. Both terms refer to the stated value of the financial instrument at the time it is issued.

Par Value Stock

YTM is also useful because it can allow you to determine which bonds would give you the best total ROI. The principal what are special item numbers sins in a bond investment may or may not be the same as the par value. Some bonds are sold at a discount, for instance, and pay back their par value at maturity.

Unlike the market value, the par values of stocks and bonds don’t change. Par value has different implications depending on whether it’s for a bond or stock. This “no-par” status means that the company has not assigned a minimum value to its stock.

Par value stock

The issuer promises to repay your initial investment—known as the principal—once the term is over, as well as pay you a set rate of interest over the life of the bond. The par value of a security is the original face value when it is issued. While bonds, common stock and preferred stock all carry a par value, it works differently for each type of security. Par value is set by the issuer and remains fixed for the life of a security—unlike market value, which fluctuates as a stock or bond changes hands on the secondary market.

1. If the share price paid is lower than par, you receive a higher rate of return than the dividend rate.
2. Companies in other states may issue no-par value stock, which has no such stated value.
3. If all 1,000 shares are purchased below par, say for $30, the company will generate only $30,000 in equity.
4. The issuer promises to repay your initial investment—known as the principal—once the term is over, as well as pay you a set rate of interest over the life of the bond.

To find the par value of a common stock, look at the shareholder’s equity section on the company’s balance sheet, which can be found in the quarterly or annual reports of publicly traded companies. If you paid more than par value to buy a bond in the secondary market, the effective interest rate you’d earn on the bond would be lower than the coupon. If you paid less than par value for a bond, the effective interest you’d earn would be higher than the coupon. While the face value or par value of these securities is important, it has little bearing on the price an investor must pay to purchase a bond or a share of stock, called the market value. Par value of shares, also known as the stated value per share, is the minimum value per share as decided by the company issuing such shares to the public. The companies then will not sell such shares to the public below the decided value.

In other words, they intend to hold on to the bond until it matures. When a company or government issues a bond, its par value represents application form the amount of money the bond will be worth at its maturity date. By issuing no-par stock, the company relinquishes any determination of value for the stock. Therefore, the company will not have a future obligation to shareholders should its stock price decline. Face value is typically an arbitrary number set by the issuer, which is usually indicated on the company’s balance sheets. Par can also refer to a bond’s original issue value or its value upon redemption at maturity.

What Is the Difference Between a Bond’s Face Value and Par Value?

With bonds, the par value is the amount of money that bond issuers agree to repay to the purchaser at the bond’s maturity. A bond is basically a written promise that the amount loaned to the issuer will be paid back. The shares can have either a no par value or low par value, which is the lowest amount that the seller is willing to sell an asset at.

Like bonds, if the share price paid is higher than par, you receive a lower rate of return than the dividend rate. If the share price paid is lower than par, you receive a higher rate of return than the dividend rate. The total value of assets reported on a company’s balance sheet only reflects the cost of the assets at the time of the transaction. To calculate the value of common stock, multiply the number of shares the company issues by the par value per share. Market value, however, is the actual price that a financial instrument is worth at any given time for trade on the stock market.

Similarly, the value of the preferred stock is calculated by multiplying the number of preferred shares issued by the par value per share. Therefore, par value is more important to a company’s stockholders’ equity calculation. Because shares of stocks will frequently have a par value near zero, the market value is nearly always higher than par. Rather than looking to purchase shares below par value, investors make money on the changing value of a stock over time based on company performance and investor sentiment. If a stock has no-par value, a company has not assigned a minimum value for its stock (often at the time of issuance).

The dollar value of bond interest and preferred-stock dividend payments are based on the par value. Knowing the par value is essential for investors to calculate and compare the returns of different bonds and preferred stocks. Par value, face value, and nominal value all refer to the same thing. For preferred stock, it’s the value that dividend payments are based on. Prices of preferred stock are quoted per share and may be higher or lower than the par value.

Par Value for Common Stock

This means, the seller has no legal liberty to sell the asset at a price that is less than the par value. Being the original value or the value of the face of the shares or stocks, this price is also known as the face value of that security. It is, however, up to the company issuing shares if it would like to assign a par value to shares or not. 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%.

However, when the bond reaches its maturity date, its market value will be the same as its par value. In modern times, the par value assigned is a minimal amount, such as one penny. That avoids any potential legal liability if the stock drops below its par value. Once set, the par value of stock remains fixed forever unless the issuing company executes a forward or reverse stock split to increase or decrease the number of its outstanding shares. These categories are both pretty much a historical oddity and have no relevance to the stock’s price in the market.

It’s helpful to think of preferred stock as a hybrid of bonds and common stock. Preferred stock represents equity in a company—a portion of ownership, like common stock. In addition, though, you are entitled to fixed dividend payments, like a bond’s fixed interest payments.