Par value

What Is Par Value?

Par value, also known as face value, is the nominal or stated value of a security, such as a share of stock or a bond, as designated by the issuer. In the realm of corporate finance, par value serves different purposes depending on the security type. For common stock, it is typically a very low, arbitrary amount that has little relation to the stock's market price. For debt securities like bonds, par value represents the principal amount that the issuer promises to repay the bondholder at the maturity date. This concept is fundamental to understanding a company's financial structure and its obligations to investors.

History and Origin

The concept of par value dates back to the 19th century, emerging as a mechanism to instill order and protection in nascent financial markets. In these early days, with limited regulations, companies sometimes issued shares at varying prices to different investors, which could lead to confusion and perceived unfairness. By establishing a par value, states aimed to ensure a minimum price for initial share issuances, providing a measure of assurance for investors and safeguarding a company's legal capital. This practice also protected creditors by ensuring that a company maintained a certain baseline amount of capital that could not be distributed away to shareholders, thereby providing a financial cushion against potential insolvency.

For instance, when Google (now Alphabet Inc.) filed its initial registration statement with the U.S. Securities and Exchange Commission (SEC) in 2004 for its initial public offering (IPO), it specified a par value of $0.001 per share for its common stock.⁶ This formal declaration on a public filing, like an SEC Form S-1, illustrates the historical and legal requirement for companies to declare a par value, even if it is a nominal figure for shares.⁵

Key Takeaways

• Par value is the nominal or face value assigned to a security by its issuer.
• For stocks, par value is typically a very low, arbitrary amount with little relation to market price.
• For bonds, par value is the principal amount repaid to the bondholder at maturity and the basis for coupon rate calculations.
• Historically, par value helped establish legal capital and protected investors and creditors, though its relevance for stocks has diminished over time.
• The market price of a security can differ significantly from its par value.

Formula and Calculation

For bonds, par value is directly used in calculating periodic interest payments. The annual interest payment, also known as the coupon payment, is determined by multiplying the bond's par value by its coupon rate.

For example, a bond with a par value of $1,000 and an annual coupon rate of 5% would pay $50 in interest per year. This formula is consistent regardless of fluctuations in interest rates or the bond's market price.

For stocks, par value does not typically factor into valuation formulas in the same way. When a company issues common stock at a price above its par value, the difference is recorded in the shareholders' equity section of the balance sheet as "additional paid-in capital."

Interpreting the Par Value

Interpreting par value depends heavily on the type of security. For preferred stock and common stock, the par value is largely a legal formality and often set at a minimal amount (e.g., $0.01 or $0.001 per share). It represents the minimum price at which the company could legally issue the shares initially. It does not reflect the company's intrinsic value, profitability, or the price at which the shares trade on an exchange.

For bonds and other fixed income securities, par value is far more significant. It represents the face amount that the bond issuer promises to repay to the bondholder at the maturity date. This value is typically $1,000 for corporate and municipal bonds, while U.S. Treasury bonds often have a par value of $1,000, $5,000, or $10,000.⁴ A bond's market price can fluctuate above or below its par value based on market interest rates, the issuer's creditworthiness, and other factors. However, at maturity, the bondholder receives the par value, regardless of the market price at which they purchased it.

Hypothetical Example

Consider a hypothetical company, "Innovate Tech Inc.," which decides to issue new shares and bonds to raise capital.

Stock Example:
Innovate Tech Inc. issues 1,000,000 shares of common stock with a par value of $0.001 per share. If the shares are sold to the public in an initial public offering (IPO) for $20 per share, the company receives $20,000,000. On its balance sheet, $1,000 (1,000,000 shares * $0.001 par value) would be allocated to the common stock account, and the remaining $19,999,000 ($20,000,000 - $1,000) would be recorded as additional paid-in capital. The par value here is merely a legal accounting entry, having no bearing on the $20 market price per share.

Bond Example:
Innovate Tech Inc. also issues bonds with a par value of $1,000, a coupon rate of 4%, and a maturity of 10 years.

• Each year, bondholders will receive $40 in interest ($1,000 par value * 4% coupon rate).
• Even if market conditions cause the bond to trade for $950 or $1,050 in the secondary market, the annual interest payment remains $40, and the company will repay exactly $1,000 to the bondholder when the bond matures in 10 years.

Practical Applications

Par value appears in various aspects of finance and investing:

• Corporate Accounting: For stocks, par value forms the basis for the stated capital portion of shareholders' equity on a company's balance sheet. The excess received from selling shares above par is recorded as additional paid-in capital.
• Bond Issuance and Trading: Par value is central to understanding bonds. It's the amount an investor can expect to receive at maturity. Bonds can trade at a premium (above par), at a discount (below par), or at par, depending on prevailing interest rates and the issuer's credit quality. For example, if interest rates rise after a bond is issued, its market price may fall below par to make its fixed coupon payments competitive with newer, higher-yielding bonds. Financial news sources regularly report on bond rates and yields, illustrating how market dynamics influence whether bonds trade above or below their par value.³
• Dividends on Preferred Stock: For preferred stock, par value is often used as the base for calculating dividend payments. Preferred stock typically pays a fixed dividend that is a percentage of its par value.
• Legal and Regulatory Compliance: Historically, par value ensured that companies maintained a minimum amount of capital, acting as a safeguard for creditors. While many jurisdictions have moved towards allowing "no-par value" shares, some regulations still reference par value for certain legal or tax calculations. Companies are required to disclose par value in their regulatory filings, such as the SEC Form S-1 for initial public offerings.

Limitations and Criticisms

The relevance of par value, particularly for common stock, has diminished significantly in modern corporate finance. Many states in the U.S. now permit the issuance of "no-par value" shares, reflecting a broader acknowledgment that the par value of common stock is largely an arbitrary number with little economic meaning.²

Critics argue that a low par value for common stock can be misleading. Investors might mistakenly believe it reflects the true minimum worth of a share, whereas the actual minimum price a share can trade for in the market is often dictated by supply and demand, not par value. Furthermore, the original intent of par value to protect creditors by defining a minimum legal capital has become less critical due to other, more comprehensive financial regulations and accounting standards that provide better transparency on a company's financial health. The nominal nature of common stock par value means it provides little actionable insight for investors performing fundamental analysis.

Par Value vs. Market Value

The fundamental distinction lies in their purpose: par value is a static, declared figure, mainly for legal and accounting purposes, especially for common stock. In contrast, market value is a dynamic price that reflects the ongoing interplay of buyers and sellers, providing the most accurate indicator of a security's current worth to investors.

FAQs

What is the par value of common stock?

For common stock, par value is a very low, nominal amount (e.g., $0.01 or less) that a company assigns to its shares. It's primarily a legal and accounting concept and usually has no direct relation to the stock's actual trading price in the market.¹

Why do companies use par value for stock if it's so low?

Historically, par value helped establish legal capital and provided a minimum issuance price to protect investors and creditors. While its economic significance has diminished, it remains a legal requirement in some jurisdictions and influences how a company's shareholders' equity is structured on the balance sheet.

Does par value affect a bond's interest payments?

Yes, for bonds, par value is crucial. The annual interest payment, known as the coupon, is calculated as a percentage of the bond's par value. For instance, a bond with a $1,000 par value and a 5% coupon rate will pay $50 in interest annually, regardless of its market price.

Can a bond's market price be different from its par value?

Absolutely. A bond's market price can be above, below, or equal to its par value. This is largely determined by changes in prevailing interest rates. If market interest rates rise above a bond's fixed coupon rate, the bond's price will typically fall below its par value (trade at a discount). Conversely, if market rates fall, the bond's price may rise above its par value (trade at a premium).

Is par value the same as face value?

Yes, par value and face value are synonymous terms. They both refer to the nominal or stated value of a security. For bonds, it's the amount repaid at maturity.