Par Value

Explained:

above par

at par

below par

face value

nominal par value

par value

principal

stated value

watered stock

 
   

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 favorable 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 principal. Principal is capital. As related in this article, 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.

Related Internal Links

common stock Non-preferred stock.

compound interest Any of several methods of crediting interest in which interest is earned on interest.

corporate bond A bond issued by a corporation.

corporation 1) A group of people, such as a guild or city, with a legal collective identity. 2) A joint-stock, limited liability corporation.

European financial regulation An overview.

legal risk Risk from uncertainty due to legal actions or uncertainty in the applicability or interpretation of contracts, laws or regulations.

notional amount The quantity of an underlier to which a derivative instrument applies.

preferred stock Stock that is senior to common stock and pays a fixed dividend.

security A financial instrument such as a stock or bond.

settlement In finance, performance on a contractual obligation.

Treasury security US Federal Government debt obligation issued by the Department of Treasury.

United States financial regulation An overview.

valuation Article about book value and market value accounting.

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copyright © Glyn A. Holton, 2005

Although the information in this website has been presented with care and obtained from sources the author believes to be reliable, there is no guarantee that it is accurate. Such information may be incomplete, condensed, outdated or presented with errors. The content of the website is for information purposes only. It is provided gratuitously, so the author shall not be liable under any theory for any damages suffered by any user. The author does not provide investment advice, and this website is not a vehicle for communicating investment advice.