Par Value: What Does it Mean?
If you’re a bond investor, the term “par value” is one you’re intimately familiar with. It’s the original issue value of the bond, also called its face value or nominal value. It’s an important concept to understand because, as any investor well knows, the value of a bond can rise or fall on the open market. It’s the benchmark that determines whether it’s selling at a discount or a premium based on its interest rate.
And it isn’t just a term for bonds. It can reference the initial value of any asset that may rise or fall in value as it’s traded. It simply means “original value.”
Here’s a closer look at par value in the context of investment products, specifically bonds and other fixed income instruments that have accompanying coupon rates.
How Much is a Bond’s Par Value?
The value of a bond depends on the type of bond it is. Most bonds start at a $1,000 par value, with nominal values ranging as high as $10,000:
- Corporate bonds traditionally sell for $1,000
- Municipal bonds generally have a $5,000 face value
- Federal bonds can have par values as high as $10,000
- Baby bonds are the exception to these examples, and tend to have par values up to but below $100. It’s also important to note that not all bonds hold fast to $1,000, $5,000 and $10,000. In many situations, investors can buy bonds in increments of these numbers.
After they’re issued, bonds trade on the open market like any other investment product. The appeal of a bond is usually the combination of the value and coupon rate, which determine the interest payments for the bond. The higher they are, the more desirable the bond.
Desirable bonds trade at a premium, that is, higher than their par value. Conversely, bonds with little-to-no carrying value might trade at a discount: lower than this value. There are other factors that can dictate a premium or a discount as well, such as whether or not the bond is callable or the credit rating of the issuer. Regardless, it serves as the benchmark for determining the value of the bond at its current market rate.
Indicator of Value
Because a bond’s par value stays the same, it’s a representation of its minimum carrying value: the total outstanding worth of the bond, including interest payments. Even if the bond has no more interest payments remaining, the bond holder can still redeem the bond for its par value. More often than not, however, bonds have a carrying value that includes remaining interest payments. This is what drives the bond’s value on the market.
The Relationship Between Par Value and Coupon
For example, a 10-year $1,000 bond might have a coupon rate of 5%, meaning it pays $50 per year. The total carrying value of the bond at issuance is $1,500. Meanwhile, a 10-year $5,000 bond might have a coupon rate of 2%. It’ll pay $100 each year and has a carrying rate of $6,000 at issuance. Income investors look at these variables to better understand which bonds offer the best value.
Depending on where the bond is in its maturity, investors may prize the high par value over the higher coupon rate. The younger the bond, the more coupon rate matters; the older it is, the more the par value comes into play.
Par Value of Stocks
As mentioned, this value is a term that applies beyond bonds. In reference to stocks, it takes on a slightly different meaning. A stock’s par value is the absolute lowest price a shareholder can redeem it for. Most companies today issue stock with this value of $0.01, sometimes fractions of a cent.
The reason for this extremely low value is to protect against liability in the event a company liquidates. Shareholders are only entitled to the par value per share, which is just a cent. If the par value was high like a bond, say, $100, the company would have a liability to pay that amount to every shareholder. By making it just a penny, a company strategically absolves itself of any real debt obligation.
Not every company records this value for shares and often, it depends on the state the company files its articles of incorporation in. Many states allow companies to issue “no par” shares, which have no value and thus, aren’t worth anything in the event of liquidation.
Par Value Says a Lot About a Bond
Par value is one of the critical variables in determining the worth of a bond—alongside coupon rate and carrying value. While a high par value might entice investors on the surface, it’s important to explore that value in the context of these other variables. As a bond comes to maturity, this value becomes a clearer and clearer indicator of its value.
Bond values may rise and fall based on market demand, but par value always stays the same. It’s a constant: something you can use as a benchmark to better understand the efficacy of an investment. For income investors, it’s an extremely important factor in deciding which bonds to invest in, and when.