What is Par Value?

Par value is a fundamental concept in finance. Also known as face value or nominal value, it describes the value of a security, such as a stock or a bond. In simpler terms, it is the minimum price at which a security can be issued.

While issuing bonds, the issuer agrees to pay the bondholder a sum of the amount during the bond’s maturity. That is what par value is in the case of bonds. In the case of stocks, it is the minimum price at which the company can sell its stocks. 

In the financial world, par value influences how securities are issued and traded and thus understanding the concept of par value is important for businesses and investors alike. In this article, we’ll realise what par value is, why companies set par value, the difference between par value and market value, and many more such topics related to par value.

Key Takeaways

• Par value is a commonly used term in finance to describe the nominal or the face value of a security. The par value concept applies to both, stocks and bonds. 

• For bonds, it is the minimum amount that the issuer promises to repay the bondholder at the end of the bond’s tenure. For stocks, it is the minimum price at which the stocks can be issued to investors. 

• Companies set the par value to protect the shareholders’ investments, meet legal requirements and maintain financial records. 

• The main difference between the par value and the market value of a security (bonds or stocks) is that the par value remains the same whereas the market value of the security may change depending upon the market conditions.

Understanding Par Value

In the case of bonds, the par value is the amount that a bondholder will receive after the bond he invested in matures. For eg. A company issue bonds at a par value or face value of Rs. 100. If an investor buys 1000 bonds, the investor will receive a minimum of Rs. 1 Lakh at maturity. 

When it comes to stocks, the issuing company assigns a par value/ nominal value/ face value to shares. This value is typically very low and can be as low as Rs. 1 per share. In easy terms, it is the minimum price a stock can be issued for. The par value has little to no relation to the market value of the stock. The market value of the stock keeps fluctuating whereas the par value of the stock remains the same. 

Companies tend to issue shares at a very low par value. For eg. the par value of a company share may be Rs. 10 whereas it would be traded at Rs. 200 (market value) in the stock market. The concept of par value in bonds is important because it helps to calculate the interest payments.

Reasons Companies Set Par Value

Par values are set for stocks and bonds for various reasons. Some of these are mentioned below.

• Raising Capital

In bonds, the par value represents the amount that the bond issuer will pay back to the investor at the maturity date of the bond. Setting a par value allows companies to raise capital while reassuring the investors of the exact amount they will receive after the tenure of the bond. 

• Legal Requirements

Corporate laws mandate companies to assign a par value to their shares. This is done so that companies can protect their shareholders from large price fluctuations by setting a low par value. 

• Accounting Purposes

Par value is the minimum amount at which a stock can be sold. This value is useful for accounting purposes as it helps the company keep track of the amount of money raised by selling shares.

Par Value Example

By referring to the below examples, you will be able to understand the importance of par value in stocks and bonds. 

Example 1: Par Value for Bonds

Let us assume that XYZ corporation has issued bonds with a par value of Rs. 1000. This means, that at the end of the bond’s maturity, the bond will be worth at least Rs. 1000. Even if the bondholder had purchased the bond for Rs. 900, the bondholder would still have received Rs. 1000 after the tenure of the bond. The excess amount is known as profit or yield.

Example 2: Par Value for Stocks

In this case, let’s say the same corporation issues shares at a par value of Rs. 10 each. The company sells 1000 shares and thus raises Rs. 10,000 as the minimum capital. However, when the shares are to be listed on the market, their market value goes up to Rs. 100 for each share. So you can see how the par value (Rs. 10) and the market value (Rs. 100) of a stock can be different. 

Par Value of Different Securities

The concept of par value applies to various securities. Some of them are mentioned below.

• Bonds

In bonds, the interest rate (coupon rate) is calculated using the par value. During the tenure of the bond, the bondholder receives periodic interest payments. When a bond matures, the issuer pays the par value to the bondholder. 

• Preference Shares

Preference shares promise a fixed payment on the basis of the par value and they are important as they affect the amount of dividend payments. For eg. If a shareholder is supposed to receive a 5% dividend on his shares that have a par value of Rs. 100, then the amount of the dividend would be Rs. 5 on an annual basis. 

Difference Between Market Value and Par Value of Securities

Confusion between the two terms must be avoided as both values denote two different concepts. 

For bonds, par value is the amount that the bond issuer promises to repay the bondholders on the bond’s maturity date. The market value of a bond is the current price at which the bond is traded. The par value of a bond does not change whereas the market value fluctuates based on various factors such as interest rates, economic conditions, and the financial health of the bond issuer. 

For stocks, par value is the minimum value at which the stock can be traded on the market. The market value of the stock is the current price at which the stock is being traded in the stock market. Even in the case of stocks, the par value does not change while the market price seldom remains the same. This is because the market value depends upon supply and demand, company earnings, overall performance, and market sentiments. 

For example, let us assume that stock ABC has a par value of Rs. 10 and a market value is Rs. 50. Now, when the market conditions are good, the market value fluctuates between Rs. 30 (52-week low) and Rs. 100 (52-week high). This means at any point in time, the par value of the stock will be the same as compared to its market value which keeps changing. 

How to Determine the Par Value of a Share of Stock?

The par value of a share of stock is determined during the incorporation of the company. Companies often issue shares with low or no par value to meet legal requirements without affecting the market value. In addition to that, it allows companies to regulate effective interest rates according to the fluctuation in market price. To get an idea of the par value of the stock, you can refer to the company’s financial statements or the articles of incorporation. For bonds, the par value is mentioned on the front of the bond. 

Conclusion

The concept of par value plays an important role in the issuance and accounting of securities. For bonds, it signifies the amount that will be paid by the bond issuer to the bondholder when the bond matures. In the case of stocks, it is the minimum amount at which stocks can be traded in the market. Understanding the difference between the par value and market value of these securities is crucial to making informed decisions while buying and selling the securities.

FAQs on Par Value