What is Par Value?
Par value is the nominal or face value of a bond, share of stock, or coupon as indicated on a bond or stock certificate. The certificate is issued by the lender and given to a borrower or by a corporate issuer and given to an investor. It is a static value determined at the time of issuance and, unlike market value, it doesn’t fluctuate.
A bond’s par value is the dollar amount indicated on the certificate, wherein the calculation of interest and the actual amount to be paid to lenders at maturity date is set. A share of stock’s par value is the minimum contribution amount made by investors to purchase one share at the time of issue.
Par Value Example
Assume that Clinton Company issues a bond to the public worth $10M. Each one of the 10,000 bonds issued has a $1,000 par value. When each bond matures at a specified date, the company will pay back the value of $1,000 per bond to the lender.
In the case of shares of stocks, Clinton Company announces that it will offer 3000 shares of common stock and each stock will have a par value of $1. That is the minimum price at which any shares will be sold.
How to Determine the Par Value of a Share of Stock
There are a number of factors by which a company sets a par value for each common stock share offered. In an initial public offering, the agreed value will have to meet the objectives of the company in these three areas:
- Initial capitalization target
- Number of public shares to be offered, as well as the ownership position of the initial owners
- Prediction of share price changes after shares are offered in the market
The objective of focusing on these areas is to achieve a robust, first day of trading, which does not disappoint the market players, analysts, and, most importantly, the new investors who are hoping that there will be a continuous increase in market value.
What is the Importance of Par Value?
For a company issuing a bond, the par value serves as a benchmark for pricing. When the bond is traded, the market price of the bond may be above or below par value, depending on factors such as the level of interest rates and the bond’s credit status.
A bond that is trading above par is being sold at a premium and offers a coupon rate higher than the prevailing interest rates. Investors will pay more, as the yield or return is expected to be higher. On the other hand, a bond that is trading below par is on a discount trade, has a lower interest rate than the current market and it is sold at a lower price.
Par value is likewise important to aspiring entrepreneurs, who are starting to form a corporation. The capitalization target is readily configured if the company will set a value for each stock offered. Shares of stock sold at a price above the par value would result in additional paid-in capital, reflected in the books of the company. Although the fluctuating market price of stocks has no effect on the books, par value has a legal bind on part of the company to its investors – no shares will be sold below that price.
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