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 bondsBondsBonds refer to the debt instruments issued by governments or corporations to acquire investors’ funds for a certain period. 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.
Table of contents
- 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 creditorsCreditorsA creditor refers to a party involving an individual, institution, or the government that extends credit or lends goods, property, services, or money to another party known as a debtor. The credit made through a legal contract guarantees repayment within a specified period as mutually agreed upon by both parties. and fixes the maximum liability of shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares..
It can be imagined as a fixed central node, and the market pricesMarket PricesMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price. circulate. The market price may fluctuate above or below the face value forced by market forces and the economic environment. However, events like stock splitStock SplitStock splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. 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 sharesPar Value Of SharesPar value of shares is the minimum share value determined by the company issuing such shares to the public. Companies will not sell such shares to the public for less than the decided value. 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 IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.. 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 marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price. 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 valueMaturity ValueMaturity value is the amount to be received on the due date or on the maturity of instrument/security that the investor holds over time. It is calculated by multiplying the principal amount to the compounding interest, further calculated by one plus rate of interest to the period's power.. It is the predefined amount determined by bond issuers when they first issue the financial instrumentFinancial InstrumentFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes. as its basic value, and this price will not fluctuate. However, when it reaches the open marketOpen MarketAn Open Market Operation or OMO is merely an activity performed by the central bank to either give or take liquidity to a financial institution. The aim of OMO is to strengthen the liquidity status of the commercial banks and also to take surplus liquidity from them., 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 rateDifference Between Bond Coupon Rate And Market Interest RateCoupon rate refers to the rate calculated on the face value of the bond. In contrast, the interest rate is the rate charged to the borrower and is manipulated by the government. 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 rateCoupon RateThe coupon rate is the ROI (rate of interest) paid on the bond's face value by the bond's issuers. It determines the repayment amount made by GIS (guaranteed income security). Coupon Rate = Annualized Interest Payment / Par Value of Bond * 100% 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 incomeInterest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. . 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 dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity. calculations are based on the face value of stocks.
Frequently Asked Questions (FAQs)
It is also known as face value. Securities like stocks or bonds are usually issued with a face value. It indicated the minimum value of the financial instrument set by the issuers and stated in the certificate or corporate charter.
It indicates the face value or minimum worth of the security. For example, if an investor wants to buy 1000 shares trading at par $1, he must pay $1000. Furthermore, the face value of stocks is usually around or below $1, whereas for bonds, it is a sizeable amount like $1000.
Though there is always a discussion of their differences, they refer to the same element, and there is no difference between them. The face value of a bond is fixed, and it is the amount promised by the issuer to repay the bondholder at its maturity. Stock can have a minimum amount set as its face value or no face value.
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 ValueNet Asset ValueNet Asset Value (NAV) refers to the net value of an entity or equity obtained by subtracting the total value of its assets from the total value of its liabilities. It also indicates the per share or unit market value of securities like mutual funds, exchange-traded funds (ETFs), indexes, etc., on a given day.
- Value InvestingValue InvestingValue investing is a long-term strategy that involves buying and holding undervalued securities, real estate, or other financial assets.
- Fair Value AccountingFair Value AccountingFair value accounting is the process of maintaining items in financial statements at their fair value and current valuation. Mark to market mechanism is applied at specified periods to change the value of items and show them as per their fair value in the market.