Understanding Par Value: A Quick Guide for Investors

What Is Par Value?

Par value, sometimes called face value, is the nominal dollar amount assigned to a security by its issuer. For stocks, it is the minimum price at which shares can be issued, while for bonds it represents the amount the issuer promises to repay at maturity. Although par value rarely matches the market price, it remains an important accounting and legal concept.

Par Value in Stocks

When a company incorporates, it typically sets a very low par value for common shares—often one cent or even a fraction of a cent. This minimizes potential legal liability because shares cannot be sold below par. Any amount investors pay above par is recorded in the company’s books as additional paid-in capital. Consequently, par value has little impact on a stock’s actual trading price, which is driven by supply, demand, and company performance.

Par Value in Bonds

With bonds, par value generally equals the principal amount that will be returned to investors at maturity, usually $1,000 per bond. Coupon payments, expressed as a percentage of par value, determine the bond’s annual interest income. For example, a 5% coupon on a $1,000 par bond pays $50 per year. When interest rates shift, the bond’s market price may rise above (premium) or fall below (discount) par, but the redemption amount stays the same.

Why Par Value Matters

Understanding par value helps investors evaluate yield, gauge legal capital, and compare securities. For equity investors, it clarifies the difference between a company’s stated capital and its market capitalization. For bondholders, it anchors calculations such as current yield and yield to maturity, both of which rely on par value to express returns accurately.

Key Takeaways

Par value serves as the foundational amount for pricing shares and bonds at issuance. While it often diverges from real-time market prices, it influences legal requirements, accounting entries, and yield calculations. Knowing how par value operates empowers investors to interpret financial statements and assess investment opportunities with greater confidence.