Par Value of Stocks and Bonds Explained

Knowing the par value is essential for investors to calculate and compare the returns of different bonds and preferred stocks. Par value, face value, and nominal value all refer to the same thing. For preferred stock, it’s the value that dividend payments are based on. The total value of assets reported on a company’s balance sheet only reflects the cost of the assets at the time of the transaction. To calculate the value of common stock, multiply the number of shares the company issues by the par value per share.

If you paid more than par value to buy a bond in the secondary market, the effective interest rate you’d earn on the bond would be lower than the coupon. If you paid less than par value for a bond, the effective interest you’d earn would be higher than the coupon. The principal in a bond investment may or may not be the same as the par value.

Par value is the value of a bond or share of stock as shown on the bond or stock certificate. Unlike the market value, the par values of stocks and bonds don’t change. Par value has different implications depending on whether it’s for a bond or stock. Because shares of stocks will frequently have a par value near zero, the market value is nearly always higher than par.

Par Value vs. Market Value: What’s the Difference?

When shares of stocks and bonds were printed on paper, their par values were printed on the faces of the shares. For example, if company XYZ issues 1,000 shares of stock with a par value of $50, cash definition accounting then the minimum amount of equity that should be generated by the sale of those shares is $50,000. Since the market value of the stock has virtually nothing to do with par value, investors may buy the stock on the open market for considerably less than $50.

1. The additional paid-in capital is a part of total paid up capital that increases the stockholders’ equity.
2. YTM factors in the market price of a bond, its par value as well as any interest you may earn along the way.
3. Par value is the face value of a bond or the value of a stock certificate stated in the corporate charter.
4. For instance, if the bond pays fixed interest at 5% and prevailing market rates fall to just 2%, people will pay more for that bond than its face in order to enjoy the higher yield.
5. The shares in a corporation may be issued partly paid, which renders the owner of those shares liability to the corporation for any calls on those shares up to the par value of the shares.
6. Par value for bonds is available in a prospectus, which is the offering document the company files with the Securities and Exchange Commission (SEC).

Journal entries for the issuance of par value stock

In some jurisdictions, a security issuance may be required to have a par value. This isn’t always the case, but in some situations, a stock or bond can’t be issued without one. The additional paid-in capital is a part of total paid up capital that increases the stockholders’ equity. Once set, the par value of stock remains fixed forever unless the issuing company executes a forward or reverse stock split to increase or decrease the number of its outstanding shares.

Though the ultimate dollar amount isn’t impacted, this distinction provides transparency regarding the source of equity capital. Therefore, it is important from an accounting perspective that these two amounts are recorded differently. Companies set a par value for their common stock because they are often legally required to do so. In the case of common stock, it just represents a legally binding contract that the stock will not be sold below a certain price, like $0.1 per share or $0.01 per share, etc.

What Is the Difference Between Face Value and Market Value?

Ultra-low par values also allow founders and early investors to buy shares in startups without expending a lot of capital. As with bonds and preferred stock, the final market value of a common stock has no relationship to its par value. For instance, if you bought a newly issued share of preferred stock with a par value of $25 and a 5% coupon rate, you’d receive $1.25 per share in dividends per year. Similar to bonds, when you buy preferred stock on the secondary market, the effective interest rate changes depending on market value versus par value. It’s helpful to think of preferred stock as a hybrid of bonds and common stock. Preferred stock represents equity in a company—a portion of ownership, like common stock.

A bond that is trading above par is being sold at a premium and offers a coupon rate higher than the prevailing interest rates. Investors will pay more, as the yield or return is expected to be higher. On the other hand, a bond that is trading below par is on a discount trade, has a lower interest rate than the current market and it is sold at a lower price. Shares usually have no par value or low par value, such as one cent per share does not reflect a stock’s market price.

Par Value vs. Market Value FAQs

The face value of a share of stock is the value per share as stated in the issuing company’s charter. This is the minimum value that each shareholder is expected to pay per share of stock in order to fund the business. This value is usually quite low—nearly $0 per share—to protect shareholders from liability in the event the business is not able to meet its financial obligations. With bonds, the par value is the amount of money that bond issuers agree to repay to the purchaser at the bond’s maturity. A bond is basically a written promise that the amount loaned to the issuer will be paid back.

However, when it reaches its maturity date, the bondholder is paid the par value regardless of if the purchase price. Thus, a bond with a par value of $100 that is purchased for $80 in the secondary market will yield a 25% return at maturity. The par value of a stock may have become a historical oddity, but the same is not true for bonds. Bonds are fixed-income securities issued by corporations and government bodies to raise capital. A bond with a par value of $1,000 really can be redeemed for $1,000 at maturity. In some states, companies are required by law to set a par value for their stocks.

Even though par value may not be the price you pay for a security, it’s still important to be aware of as it may impact the amount of interest or dividend payments you receive. When each bond matures at a specified date, the company will pay back the value of $1,000 per bond to the lender. They could also be issued at a premium or a discount depending on the level of interest rates in the economy. A bond that is trading above par is said to be trading at a premium, while a bond trading below par is trading at a discount.

Par value is required for a bond or a fixed-income instrument and defines its maturity value and the value of its required coupon payments. A financial instrument’s par value is determined by the institution that issues it. Market value is the current price at which a bond or stock can be traded on the open market and constantly fluctuates as investors buy and sell bonds and shares of stock. A bond’s coupon rate determines whether a bond will trade at par, below par, 5 ways debt can make you money or above par value.

Although the fluctuating market price of stocks has no effect on the books, par value has a legal bind on part of the company to its investors – no shares will be sold below that price. Par values are typically used as pricing measures for bond and preferred stock buyers. Investors buy and sell bonds at prices that are above par (at a premium), below par (at a discount), or at par. Companies issue corporate bonds with a par value of up to $1,000, while par values for government and agency bonds may be higher or lower than $1,000. Treasury bonds is $100 while the par value for Ginnie Mae bonds is a minimum of $25,000.

In addition, though, you are entitled to fixed dividend payments, like a bond’s fixed interest payments. Some common stock may also offer dividends, but these are normally at lower rates and are more likely to be foregone if a company has a hard quarter or year. While preferred stocks’ dividends are not guaranteed like bond interest payments, they are much less likely to be waived.