Par Value

Par value is the stated—or face—value of a financial instrument when it is issued. It applies primarily to bonds and stocks and serves different legal, contractual, and accounting purposes than market value, which fluctuates with supply and demand.

Key points

• For bonds, par value is the amount the issuer promises to repay at maturity and is the basis for calculating coupon (interest) payments.
• For stocks, par value is a nominal amount shown in the corporate charter or on the stock certificate; it is typically unrelated to market price and is often set very low or omitted (no-par stock).
• Par value has accounting and legal implications (e.g., legal capital and creditor protection) but usually does not reflect the economic value investors pay in the market.

Par value of bonds

• Definition: The face amount repaid to bondholders at maturity.
• Coupon payments: Calculated from par value. Example: a $1,000 bond with a 4% coupon pays $40 per year.
• Pricing vs. par:
• Trading at par: market interest rates equal the coupon rate.
• Trading at a premium: bond price > par when its coupon is more attractive than prevailing rates.
• Trading at a discount: bond price < par when market rates exceed the coupon.
• Typical par amounts:
• Corporate bonds: commonly $100 or $1,000.
• Municipal bonds: often $5,000.
• Treasury bills: sold at a discount to par (no periodic coupon).

Par value of stocks

• Legal/nominal value: Set in the corporate charter and often very small (e.g., fractions of a dollar) or designated as no-par.
• No-par stock: Has no stated minimum and simplifies equity presentation—proceeds are credited directly to the common stock account.
• Practical effect: Par value rarely reflects market trading price. It mainly affects legal capital and can be a requirement in some jurisdictions.

Why companies set par value

Companies assign par value for several reasons:
* Legal compliance: Some jurisdictions require a par value when incorporating or issuing shares.
* Creditor protection: Par value establishes a base amount of capital that helps prevent all assets from being distributed as dividends.
* Investor perception: A par value (even minimal) can signal formal compliance and structure.
* Accounting clarity: Distinguishes nominal share value from amounts paid over par (additional paid-in capital), improving transparency in equity reporting.

Par value vs. market value

• Par value: Issuer-defined, fixed at issuance (or absent for no-par stock).
• Market value: Current trading price driven by supply and demand, company performance, interest rates, macroeconomic conditions, and investor sentiment.
• For stocks, market value almost always diverges from par value. For bonds, market value moves relative to par depending primarily on interest-rate movements and credit risk.

Accounting implications

• When shares are issued:
• The par value per share is recorded in the Common Stock account.
• Any proceeds received above par are recorded as Additional Paid-In Capital (APIC).
• Example: If 1,000 shares with $1 par are sold for $5 each, Common Stock = $1,000 and APIC = $4,000.
• No-par shares: Total proceeds are credited to Common Stock, removing the par/APIC split and simplifying presentation.
• Legal capital: Par value helps determine the legal capital that must remain in the company to protect creditors under some laws.

Common questions

What does par value at maturity mean?
* For bonds, it is the face amount the issuer pays the bondholder when the bond matures.

What does no-par value mean?
* The stock has no stated minimum price per share; its value is determined entirely by the market and is recorded differently in accounting.

Are bonds always issued at par?
* No. Bonds may be issued or trade at a premium or discount depending on prevailing interest rates and demand.

How does coupon rate relate to par value?
* Coupon payments are a percentage of par value. Whether a bond trades above or below par depends on how its coupon compares with current market interest rates.

Is par value required?
* Requirements vary by jurisdiction. Some places require par value; others permit no-par shares.

Conclusion

Par value is a formal, issuer-defined figure with important contractual, legal, and accounting roles. For bonds it directly determines maturity repayment and coupon calculations. For stocks it is usually a nominal amount (or absent) and rarely reflects market price, but it still affects legal capital and how equity is presented on the balance sheet. Understanding the distinction between par value and market value helps clarify how securities are priced, issued, and reported.