Business, Legal & Accounting Glossary
The face value of a stock, assigned by a corporation at the time the stock is issued. The par value is often printed on the stock certificate, but the market value of the stock may be much more or much less than par.
Par value is the face or stated value of a security.
For common stock, par value is merely a vestige of earlier corporate law and is now usually meaningless.
Many US states no longer require that a new equity issue have a stated par value; thus companies issue new shares without a par value, or “no par value” stock. Where state law still requires a par value, issuing corporations often choose a par value of $.01. Most important, the par value of common stock usually bears no relationship to either the cash the company received when issuing it or its current market value. In contrast, preferred stock is usually issued and sold near its par value, and its dividend rate is often stated as a percentage of that par value. Similarly, the par value of a bond is its face value, i.e., the amount of principal due to shareholders at maturity. But note that, because of interest rate fluctuations, the price of a bond after issuance is rarely its par value.
The notion of par value (or stated value) has somewhat archaic origins, dating back several hundred years. Par value was the stated price at which a new corporation’s stock would be issued. For investors, par value served as a guarantee that other investors would not receive shares on more favourable terms. Par values would be printed prominently on stock certificates. They would also be stated in the articles of incorporation. These might read something like
250,000 shares of common stock will be issued, each with a par value of $10, and 10,000 shares of preferred stock will be issued, each with a par value of $100.
Bonds were also issued with stated par values. Accordingly, par value can be thought of as, in some sense, a stated value of any security.
The protection par values provided investors became less important over time. Financial regulation and increased transparency—due to newspapers and telecommunications—made them less important. Also, as markets became more liquid, with prices responded more rapidly to market developments, it became increasingly difficult for a corporation to commit in advance to issue securities at their par value.
For common stocks, par value became a stated minimum issue price. In the United States, a corporation could issue stock at a price in excess of par value. If it issued the stock below par value, the stock was called watered. Purchasers of watered stock were liable to the corporation for the difference between the par value and the price they paid. Today, in many jurisdictions, par values are no longer required for common stocks. In jurisdictions that still require them, corporations typically state nominal par values, perhaps listing a USD .01 par value for a stock that will be issued at USD 25.00.
For preferred stocks, par value remains relevant. Preferred stock is typically issued at a price close to the par value. Preferred stock dividends are calculated as a percentage of par value. Also, if common stock is callable, it is usually at par value or at a small premium over par value.
In fixed income markets, par values are very relevant. For discount instruments, such as T-bills, the instrument’s par value is its maturity value. A standard coupon bond, on the other hand, is designed to be sold for some par value, pay periodic coupon payments equal to a percentage of that par value, and then return the par value to the investor at maturity. Accordingly, the par value, together with any final coupon, is the maturity value of the bond. Due to interest rate fluctuations between the time that a bond’s coupon is set and the time when the bond is actually issued, bonds rarely sell at exactly par value. A bond’s par value is sometimes also called its face value.
When issued, or in the secondary market, a bond sells above par if the clean price exceeds its par value. It sells below par if the clean price is below par. It sells at par if the clean price equals the par value. A bond’s price may be above or below par due to changes in interest rates or change in the bond’ credit quality.
When cash or cash equivalents are invested, that investment is called the principal. The principal is capital. As related in this overview, par value traditionally represented an amount of principal to be invested, either in debt or equity. Obviously, that is no longer exactly true. Bonds are often issued or traded at prices other than their par values, and the par value of stocks today is unrelated to prices at which the stock might be issued or trade. However, “principal” is still often used synonymously with “par value” in situations where the actual principal amount does approximate the par value. For example, coupon bonds are often issued close to par, and a bond’s par value is called its principal amount. However, in the case of a discount instrument, par value is the instrument’s maturity value, which is very different from the investor’s principal investment.
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This glossary post was last updated: 23rd April, 2020 | 0 Views.