What Is Par Value?
The par value of a bond is its face value. In other words, it’s the loan principal the issuer pays you at the end of the bond’s term. The interest you earn on the bond (“coupon rate”) is a percentage of par. Par value is also a pricing benchmark for shares of preferred stock. Corporations issue preferred stock with a dividend rate that, like a coupon rate, is a percentage of par value. Unlike common stock, preferred shareholders don’t usually have voting rights. Common-stock par value is shown on the stock certificate and is established by the board of directors at the time the stock is issued. In some states, the par value of common stock issued can’t be withdrawn or used by the issuing company. For this reason, companies often issue common stock with a par value of 1 cent per share or less; in this way, they can avoid tying up excessive amounts of money in stock. Also, higher par values can lead to higher taxes in some states.
How Par Value Works
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. For example, the par value for U.S. Treasury bonds is $100 while the par value for Ginnie Mae bonds is a minimum of $25,000. Price quotes for bonds are a percentage of par. For example, a bond price of 95 means the bond is priced at 95% of its par value. Conversely, a bond price of 105 means its price is 105% of its par value. A bond selling below par means the interest you would receive from the investment is higher than the coupon rate. Prices of preferred stock are quoted per share and may be higher or lower than the par value. Like bonds, if the share price paid is higher than par, you receive a lower rate of return than the dividend rate. If the share price paid is lower than par, you receive a higher rate of return than the dividend rate.
Par Value vs. Face Value
Par value, face value, and nominal value all refer to the same thing. For bonds, it’s the principal of the loan to be repaid. For preferred stock, it’s the value that dividend payments are based on. For common stock, it’s used to comply with state regulations.
Par Value vs. Market Value
The company or government entity offering a bond or stock establishes the par value. The market price is the price at which you can buy and sell stocks or bonds on an exchange like NASDAQ or the NYSE. And while a preferred stock or bond’s par value remains the same, market value fluctuates, as is often seen with the stock and bond markets.
Why Investors Need To Know Par Value
The dollar value of bond interest and preferred-stock dividend payments are based on the par value. Knowing the par value is essential for investors to calculate and compare the returns of different bonds and preferred stocks.
How To Find Par Value
You can usually find par values for preferred stocks in their quotes and through your broker-dealer’s research tools. Par value for bonds is available in a prospectus, which is the offering document the company files with the Securities and Exchange Commission (SEC). You can find a company’s prospectus using the SEC’s online EDGAR system or get it from your broker-dealer.
