Par Value, otherwise known as Face Value or Nominal Value, is the value of a security as stated by the issuing entity. A security is often offered for this standard denomination of money, which may or may not correspond to its current market value.
In this context, the term “security” refers to a financial instrument representing ownership, a debt agreement, or rights to ownership that can be bought and sold.
Examples of securities include stocks, bonds, options, futures, and mutual funds.
Applications of par value
In Stocks:
- Initial Value
In stocks, par value is the minimum price at which shares are initially issued.
- Legal implications
It may have legal consequences, especially if it is being sold at the minimum price for which shares can be sold.
- Symbolic Value
Today, the par value of a stock is often set at a minimal amount, occasionally, even a fraction of a cent, making it largely symbolic.
In Bonds:
- Redemption Value
For bonds, the par value is the amount paid to the bondholder at maturity.
- Interest Calculation
Bondholders earn interest as a fixed percentage of the bond’s par value, which serves as the basis for calculating interest payments.
For example, Investopedia.com explains that if you buy a bond with a $100 par value that matures in one year, you’ll receive the $100 face value at maturity, along with the interest accrued over that period.
Bondholders get interest in the form of a specified percentage of the par value, which is also a basis for calculating interest payments.
Implications
For investors:
- Stocks
Par value has limited significance for stock investors in modern markets.
- Bonds
It is important to bond investors because it impacts both the maturity return and the periodic interest payments.
For Companies:
- Capital Structure
A company’s legal capital structure may be affected by par value decisions for its stock.
- Bond Issuance
When issuing bonds, the par value can influence investors’ perceptions and appeal of the bond.
Challenges and considerations regarding par value
There are several challenges people may face, including:
- Misinterpretations
In some cases, par value is mistakenly equated with market value, which may lead to some confusion among inexperienced investors.
- Regulatory Requirements
Different jurisdictions have their own unique legal standards that companies must adhere to regarding par value.