Par value, also called face value or nominal value, represents the fixed value assigned to a financial security at the time it is issued. It is a foundational concept that has different implications depending on whether it’s applied to stocks or bonds.
Par Value in Stocks
For common stocks, par value is typically a minimal, often symbolic amount such as $0.01 or $1 per share. Historically, par value served to establish a minimum legal capital a company had to maintain, protecting creditors by preventing shares from being sold below that amount. Today, however, par value for common stock generally has little practical impact on market prices or investor decisions. Instead, actual share prices depend on market demand, company performance, and overall economic conditions.
Preferred stocks may use par value differently. Since their dividends are often fixed as a percentage of par value, the par value directly affects dividend payments. For instance, a preferred stock with a $100 par value and a 5% dividend rate pays $5 annually.
In stock accounting, the difference between the market price and the par value is recorded as additional paid-in capital, reflecting the amount investors have paid above the nominal share value.
Par Value in Bonds
In bonds, par value is crucial as it represents the principal amount the issuer promises to pay back at maturity. Commonly, corporate bonds have a par value of $1,000, while municipal bonds often have $10,000 par values. The bond’s coupon interest is calculated as a percentage of the par value. For example, a 5% coupon bond with a $1,000 par value pays $50 annually in interest.
Bonds trade on the secondary market at prices that can be above (premium), below (discount), or equal to (par) the par value depending on factors such as changes in interest rates, credit risk, and time to maturity. A bond trading at a premium has a coupon rate higher than current market rates, making its fixed income more valuable. Conversely, discount bonds have lower coupon rates than prevailing rates, reducing their market price.
Understanding par value is essential for bond investors to evaluate yields and expected returns accurately.
Par Value and Other Investment Vehicles
Unlike stocks and bonds, mutual funds and exchange-traded funds (ETFs) do not have par values. Their value is based on Net Asset Value (NAV), reflecting the market value of underlying assets minus liabilities divided by shares outstanding.
Why Par Value Matters
- For Common Stock Investors: Par value has mostly legal and accounting relevance, not affecting trading prices or investment potential.
- For Bond Investors: Par value defines the principal repayment amount and is the basis for interest calculations, directly impacting investment income and yield.
Common Misunderstandings About Par Value
- Par value is not the same as market price; stocks and bonds rarely trade at par value.
- Low par value stocks are not necessarily cheap or risky investments.
- Bonds do not change par value; only market prices fluctuate.
Quick Comparison Table
| Feature | Common Stocks | Bonds |
|---|---|---|
| Purpose | Legal/accounting minimum capital | Principal repayment & interest basis |
| Typical Par Value | Low (e.g., $0.01 or no par) | $1,000 (corporate), $10,000 (municipal) |
| Market Impact | Minimal | Significant for yield & returns |
| Income Impact | None for common stock | Interest payments directly tied to par |
| Investor Relevance | Mostly formal | Critical for bonds investment decisions |
Frequently Asked Questions
Q: Does a low par value mean a stock is a bad investment?
A: No. Par value is a legal formality and doesn’t indicate stock quality or investment worth. Focus on fundamentals and market price.
Q: Why do stocks have par value?
A: Mainly for legal and accounting reasons to establish minimum capital and protect creditors.
Q: Can a bond’s par value change?
A: No, par value is fixed at issuance. Market prices vary, but repayment at maturity is based on par value.
For more detailed insights on related topics, visit our Bonds glossary and Net Asset Value page.
Authoritative Source
For additional information, see the IRS and Investopedia’s guide on par value (accessed 2025).