Par value definition
/What is Par Value for Stock?
Par value is the stock price stated in a corporation’s charter. The intent behind the par value concept was that prospective investors could be assured that an issuing company would not issue shares at a price below the par value. However, par value is now usually set at a minimal amount, such as $0.01 per share, since some state laws still require that a company cannot sell shares below the par value; by setting the par value at the lowest possible unit of currency, a company avoids any trouble with future stock sales if its shares begin to sell in the penny stock range.
Some states allow companies to issue shares with no par value at all, so that there is no theoretical minimum price above which a company can sell its stock. Thus, the reason for par value has fallen into disuse, but the term is still used, and companies issuing stock with a par value must still record the par value amount of their outstanding stock in a separate account.
The amount of the par value of a share of stock is printed on the face of a stock certificate. If the stock has no par value, then "no par value" is stated on the certificate instead.
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What is Par Value for Preferred Stock?
The par value of a share of preferred stock is the amount upon which the associated dividend is calculated. Thus, if the par value of the stock is $1,000 and the dividend is 5%, then the issuing entity must pay $50 per year for as long as the preferred stock is outstanding.
What is Par Value for Bonds?
Par value is the stated face value of a bond. It is usually set at $1,000, which is the face amount at which the issuing entity will redeem the bond certificate on the maturity date. The par value is also the amount upon which the entity calculates the interest that it owes to investors. Thus, if the stated interest rate on a bond is 10% and the bond par value is $1,000, then the issuing entity must pay $100 every year until it redeems the bond. Thus, par value is important from the perspectives of both determining the maturity amount to pay back to investors, and the amount of interest to pay them.
Bonds commonly sell on the open market at prices that may be higher or lower than the par value. These variations are caused by differences between the market interest rate and the stated interest rate of a bond, as well as changes in the credit rating of the bond. If the price is higher than the par value, the issuing entity still only has to base its interest payments on the par value, so the effective interest rate to the owner of the bond will be less than the stated interest rate on the bond. The reverse holds true if an investor buys a bond at a price below its par value - that is, the effective interest rate to the investor will be more than the stated interest rate on the bond.
Example of Par Value for Bonds
For example, ABC Company issues bonds having a $1,000 par value and 6% interest rate. An investor later buys an ABC bond on the open market for $800. ABC is still paying $60 in interest every year to whoever holds the bond. For the new investor, the effective interest rate on the bond is $60 interest ÷ $800 purchase price = 7.5%.