Definition of PAR
PAR, in the context of finance, refers to the face amount or stated value of a negotiable instrument, such as a bond, stock, or bill of exchange, rather than the actual value it would receive on the open market. Essentially, when these financial instruments are sold for their stated value, they are said to be sold “at par.”
Examples
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Par Value of Stocks: A company’s common stock might have a par value of $1 per share. This is a nominal value and does not necessarily reflect the market value of the stock, which could be much higher or lower.
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Bonds at Par: A corporate bond might have a par value of $1000. If the bond is traded at its issuance price of $1000, it’s said to be trading at par.
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Bills of Exchange: A bill of exchange might have a face value of $5000. If it’s sold or traded for exactly $5000, it is considered to be sold at par.
Frequently Asked Questions (FAQs)
What is the difference between par value and market value?
Par value is the nominal value assigned to an instrument by the issuer, while market value is the current price at which the instrument can be bought or sold in the market.
Can stocks trade below par?
Yes, stocks can trade below par (also known as “trading at a discount”) or above par (referred to as “trading at a premium”), depending on market conditions and company performance.
Why do companies issue stocks with a par value?
Par value is a legal concept that represents the minimum price at which shares can be issued to protect creditors by ensuring that shareholders cannot pay less than this value for a company’s stock.
How is par value relevant in bonds?
For bonds, par value represents the amount to be repaid at maturity. It is also used to calculate periodic interest payments (coupons), which are a percentage of the par value.
- Face Value: Another term for par value, typically used in the context of bonds.
- Discount: When a financial instrument is sold for less than its par value.
- Premium: When a financial instrument is sold for more than its par value.
- Coupon Rate: The annual interest rate paid on a bond, expressed as a percentage of the par value.
Online References
Suggested Books for Further Studies
- Fundamentals of Investments by Charles J. Corrado and Bradford D. Jordan
- Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
- Investment Analysis and Portfolio Management by Frank K. Reilly and Keith C. Brown
Fundamentals of PAR: Finance Basics Quiz
### What does "par value" represent?
- [ ] The market value of a security
- [ ] The trading volume of a stock
- [x] The nominal or face value of a security
- [ ] The annual dividend of a stock
> **Explanation:** Par value represents the nominal or face value of a security as declared by the issuer, not its market value.
### What happens when a financial instrument is sold for its par value?
- [x] It is sold at par.
- [ ] It is sold at a discount.
- [ ] It is sold at a premium.
- [ ] It triggers a margin call.
> **Explanation:** When a financial instrument is sold for its par value, it is sold "at par."
### What is another term synonymous with "par value"?
- [ ] Market value
- [ ] Intrinsic value
- [ ] Book value
- [x] Face value
> **Explanation:** "Face value" is another term synonymous with "par value."
### If a bond has a face value of $1000 and is sold for $950, it is said to be sold:
- [ ] At par
- [x] At a discount
- [ ] At a premium
- [ ] Ex-dividend
> **Explanation:** If the bond is sold for less than its par value, it is sold "at a discount."
### In the context of stocks, what is one function of declaring a par value?
- [ ] To determine annual dividends
- [ ] To indicate market expectations
- [x] To establish a minimum issue price
- [ ] To reflect book value
> **Explanation:** Declaring a par value helps to establish a minimum price at which the shares can be issued, protecting creditors.
### True or False: A stock's par value determines its market selling price.
- [ ] True
- [x] False
> **Explanation:** Par value is a nominal value and does not determine a stock's market selling price, which is influenced by market conditions.
### What is commonly used to describe bonds that are trading above their par value?
- [ ] At a discount
- [x] At a premium
- [ ] Below par
- [ ] Ex-coupon
> **Explanation:** Bonds trading above their par value are said to be trading "at a premium."
### What signifies a bond's periodic interest payment in relation to par value?
- [ ] Market yield
- [x] Coupon rate
- [ ] Default risk
- [ ] Current yield
> **Explanation:** The coupon rate signifies the bond's periodic interest payment and is expressed as a percentage of the par value.
### Which of the following would NOT be affected by the par value of a stock?
- [x] The stock’s fluctuation in the market
- [ ] Legal capital of a corporation
- [ ] Minimum issue price
- [ ] Initial accounting entry for common stock
> **Explanation:** The stock's fluctuation in the market is generally not affected by its par value but by market supply and demand conditions.
### Why are bonds issued at par significant?
- [ ] They indicate the market's maximum price for bonds.
- [x] They establish the maturity repayment amount.
- [ ] They align with the economic forecast.
- [ ] They guarantee the highest returns.
> **Explanation:** Bonds issued at par establish the amount that will be repaid at maturity, making the par value significant for bondholders.
Thank you for diving deep into understanding the term PAR. Continue expanding your knowledge in finance with our quizzes and suggested readings!
