Par value, also called face value or nominal value, is the stated value of a security as set by its issuer. For a bond it is the amount the issuer promises to repay at maturity and the amount on which interest is calculated. For a share it is a nominal value recorded in the company's constitution and accounts, often a fraction of a cent, which has little to do with what the share actually trades for.
Par is the benchmark against which bond prices are quoted: a bond trading above par is at a premium, one trading below it is at a discount. For shares, par value is mainly a matter of company law and accounting, separating the legal share capital from the extra amount investors paid. The term is also used for currencies and payments, as in the par values of the Bretton Woods system or cheques cleared "at par", meaning without a deduction.
Par value in plain terms
Think of a gift voucher with "50" printed on it. That printed amount is its face value: it is what the shop has promised to honour. If someone sells you the voucher for 45, you got it below face value; if a collector pays 55, it went above. The printed number never changes, even as the price people pay for the voucher does.
A bond's par value is that printed amount: the sum the borrower will hand back at the end. For shares, the printed amount is more like a label from the company's paperwork. A share with a par value of one cent can easily sell for 100, because what buyers care about is the business behind it, not the label.
Par value of bonds
Most US corporate bonds have a par value of $1,000, and Treasury securities are sold in multiples of $100. Bond prices are quoted as a percentage of par, so a price of 98.50 on a $1,000 bond means $985, and 101.25 means $1,012.50. The coupon is fixed as a percentage of par, whatever the bond's price:
- is the annual coupon payment in money.
- is the coupon rate, written as a decimal.
- is the par (face) value.
Worked example: a $1,000 bond with a 5% coupon pays , or $50 a year, typically as two payments of $25. If market interest rates rise to 6%, the bond's price falls below par so that a buyer still earns about 6% overall; if rates fall to 4%, its price rises above par. That relationship is the basis of interest rate risk, and it is why the yield to maturity of a bond bought away from par differs from its coupon rate. Whatever happens in between, the holder at maturity receives par, assuming no default. Zero-coupon instruments, such as Treasury bills, pay no coupon and are sold below par, the difference being the investor's return.
Par value on shares began as a protection for creditors: a company could not issue shares for less than par, so the par amount represented capital that had genuinely been paid in. Over time, most companies set par very low, often $0.01 or $0.0001 per share, so that it would never restrict issuing shares at market prices. Most US states, including Delaware, also allow companies to issue no-par shares.
In the accounts of a US company, common stock is recorded at par and anything investors paid above par goes to additional paid-in capital. UK law works similarly but is stricter: under the Companies Act 2006 every share must have a fixed nominal value, shares may not be allotted at a discount to it, and any amount paid above nominal value must be credited to a share premium account. Par value can matter in practice; for example, Delaware's annual franchise tax can be calculated with a method that uses the par value of authorised shares, which is why start-ups pay attention to it.
Par value of preferred stock
For preferred stock, par value is more meaningful. Many US preferred shares sold to retail investors have a par value of $25, and institutional issues often $1,000. The preferred dividend is usually set as a percentage of par: a 6% preferred share with $25 par pays $1.50 a year. Par is also often the amount preferred holders are entitled to receive ahead of common shareholders if the company is wound up, and the price at which the issuer can redeem the shares if they are callable.
Par value and market price
The par value of a share says nothing about its market price or its worth; that depends on profits, assets and prospects. For a bond, par is the anchor that the market price returns to as maturity approaches, a process known as "pull to par". Comparing a fixed income security's price with its par value is therefore one of the first steps in reading a bond quote, while for shares other measures, such as the price-to-book ratio, are used instead.