Definition
Par Value, also referred to as face value or nominal value, is the value at which a bond or stock is issued by the issuing company. For bonds, it is the amount that will be paid back to the bondholder at maturity. For stocks, it represents the minimum price at which new shares can be issued. Typically, the par value of stocks is quite low and often does not reflect the actual market value.
Examples
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Stocks:
- A company issues 1,000 shares of its common stock with a par value of $1 per share. This means that the company cannot sell these shares for less than $1 each.
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Bonds:
- A corporation issues a bond with a par value (or face value) of $1000. This amount will be returned to the bondholder at the time of maturity, regardless of the bond’s market price at any given time.
Frequently Asked Questions
Q1: What happens if a stock’s market value is higher than its par value?
- Answer: If a stock’s market value exceeds its par value, the stock is said to be “above par.”
Q2: Can the market value of a bond be different from its par value?
- Answer: Yes, a bond’s market value can fluctuate based on interest rate changes, credit rating of the issuer, and other factors. However, the par value is the amount that will be repaid at maturity.
Q3: Why do companies issue stock with a par value?
- Answer: Companies issue stock with a par value to set a minimum price per share for accounting and legal purposes.
Q4: What does “below par” mean in terms of bonds and stocks?
- Answer: If the market value of a bond or stock falls below its par value, it is said to be “below par.”
Q5: Can par value change after the stock or bond is issued?
- Answer: No, the par value is fixed at issuance and does not change.
Market Value:
Market value is the price at which a given security is currently trading on the open market.
Above Par:
When a security is trading at a price higher than its par value.
Below Par:
When a security is trading at a price lower than its par value.
Gilt-edged Security:
A high-grade bond issued by certain national governments that typically pays back at par value.
Online References
- Investopedia: Par Value
- The Motley Fool: Understanding Par Value for Bonds
- Corporate Finance Institute: Par Value of Stock
Suggested Books for Further Studies
- Accounting for Non-Accountants by Wayne Label
- Finance for Non-Financial Managers by Gene Siciliano
- Financial Accounting by Walter T. Harrison Jr. and Charles T. Horngren
Accounting Basics: “Par Value” Fundamentals Quiz
### What is the par value of a security?
- [x] The minimum price at which the security is issued.
- [ ] The market value of the security.
- [ ] The profit margin of the security.
- [ ] The highest trading price of the security.
> **Explanation**: The par value is the minimum price at which a security can be issued by the issuer.
### Can the par value of a stock change after its issuance?
- [ ] Yes, it changes with market value.
- [x] No, it remains the same.
- [ ] It changes based on quarterly performance.
- [ ] It is adjusted annually.
> **Explanation**: The par value of a stock is fixed at issuance and does not change.
### What does "below par" mean?
- [ ] Security is trading at double its par value.
- [x] Security is trading below its par value.
- [ ] Security is trading at par value.
- [ ] Security is trading above its par value.
> **Explanation**: "Below par" means that the market value of the security is trading below its par value.
### When a bond has a par value of $1000, what does this represent?
- [ ] The monthly interest payment.
- [ ] The market price of the bond.
- [x] The amount repaid at maturity.
- [ ] The trading price of the bond.
> **Explanation**: The par value of $1000 represents the amount that will be repaid to the bondholder at maturity.
### Can a company's stock have a par value of $0.01?
- [x] Yes, for legal and accounting purposes.
- [ ] No, it must be at least $1.
- [ ] Only for preferred shares.
- [ ] Only in secondary markets.
> **Explanation**: A company's stock can have a par value as low as $0.01 to meet legal and accounting requirements.
### What is a common characteristic of gilt-edged securities?
- [ ] Always traded below par.
- [ ] Frequently default.
- [ ] Always repaid at par.
- [x] Always repaid at par value.
> **Explanation**: Gilt-edged securities, usually issued by national governments, are typically repaid at par value.
### In the context of bonds, what does yield above par value indicate?
- [ ] Higher interest rates than the bond's coupon rate.
- [ ] The bond premium.
- [ ] The bond's appreciation.
- [x] None of the above.
> **Explanation**: Yield is a different financial metric and does not indicate trading above par value directly.
### Why might a stock trade above its par value?
- [ ] Due to high par value.
- [x] High demand and strong company performance.
- [ ] Increased company liabilities.
- [ ] Regulatory adjustments.
> **Explanation**: A stock might trade above its par value due to high demand and positive company performance.
### What is the face value of a bond synonymous with?
- [ ] Market value.
- [ ] Trading price.
- [x] Par value.
- [ ] Discount rate.
> **Explanation**: The face value of a bond is synonymous with its par value.
### Can gilt-edged securities have a market value below par?
- [ ] Never.
- [x] Yes, depending on economic conditions.
- [ ] Only if defaulted.
- [ ] Only if misappropriated.
> **Explanation**: Gilt-edged securities can have a market value below par depending on economic conditions, despite assurances on par repayment.
Thank you for exploring our detailed explanation and challenging yourself with our quiz on par value. Continue learning and striving for investment excellence!
