Friday, 7 July 2017

Investopedia: What is 'Par Value'?

Par Value
What is 'Par Value'

The face value of a bond. Par value for a share refers to the stock value stated in the corporate charter. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. Par value for a bond is typically $1,000 or $100. Shares usually have no par value or very low par value, such as 1 cent per share. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit status. In the case of equity, par value has very little relation to the shares' market price.

Also known as nominal value or face value.


For example, a bond with par value of $1,000 and a coupon rate of 4% will have annual coupon payments of $40. A bond with par value of $100 and a coupon rate of 4% will have annual coupon payments of $4.

One of the main factors that causes bonds to trade above or below par value is the level of interest rates in the economy, as compared to the bonds’ coupon rates. A bond with a 4% coupon will trade below par if interest rates are at 5%. This is because in such a scenario, investors have a choice of buying similar-rated bonds that have a 5% coupon. The price of a lower-coupon bond therefore must decline to offer the same 5% yield to investors. Likewise, a bond with a 4% coupon will trade above par if interest rates are at 3%.

A bond that is trading above par is said to be trading at a premium, while a bond trading below par is regarded as trading at a discount. During periods when interest rates are low or have been trending lower, a larger proportion of bonds will trade above par or at a premium. When interest rates are high, a larger proportion of bonds will trade at a discount.

If an investor buys a taxable bond for a price above par, the premium can be amortized over the remaining life of the bond, offsetting the interest received from the bond and hence reducing the investor’s taxable income from the bond. Such premium amortization is not available for tax-free bonds purchased at a price above par.

Short for "par value," par can refer to bonds, preferred stock, common stock or currencies, with different meanings depending on the context. Par most commonly refers to bonds, in which case it means the face value, or value at which the bond will be redeemed at maturity. This is usually $1,000 for corporate issues and can be more for government issues. A bond can trade above or below par, reflecting the broader interest rate environment and the issuer's perceived credit worthiness.

In its most common usage, par value applies to bonds. The term refers to the face value of the bond, that is, the value at which the issuer will redeem the bond at maturity (assuming it does not default). Most bonds are issued at par value, but this is not always the case: discount bonds can be issued below par value, but must be redeemed at that value. Par value for corporate bond issues is usually $1,000. Government issues can have higher par values.
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