Par value, also known as face value or nominal value
, is a term commonly used in finance to denote the stated value of a security, such as a bond
or a stock
, as determined by the issuing company. It represents the initial price at which the security is issued and is typically printed on the face of the security certificate.
In the context of bonds, par value refers to the amount that the bondholder will receive upon maturity
, assuming the issuer does not default. It represents the principal
amount that the issuer is obligated to repay to the bondholder at the end of the bond's term. For example, if a bond has a par value of $1,000, the bondholder will receive $1,000 when the bond matures.
In the case of stocks, par value represents the minimum legal capital that a company must maintain. It is usually set at an arbitrary low value, such as $0.01 per share, and has little relevance to the market price
of the stock. Par value is primarily used for accounting
and legal purposes, such as determining the company's capital structure and calculating dividends.
It is important to note that par value does not necessarily reflect the market value
or intrinsic value
of a security. In fact, it is quite common for securities to trade above or below their par value in the secondary market. The market price of a security is influenced by various factors such as supply and demand dynamics, interest
rates, company performance, and investor
Par value also plays a role in determining the coupon rate
rate of a security. Bonds are often issued with a fixed coupon rate expressed as a percentage of their par value. For example, a bond with a par value of $1,000 and a coupon rate of 5% will pay an annual interest of $50 ($1,000 * 5%) to the bondholder. Similarly, some stocks may have a fixed dividend rate based on their par value.
In summary, par value in finance refers to the stated value of a security at the time of issuance. It represents the principal amount that will be repaid to bondholders upon maturity and sets the minimum legal capital for stocks. While par value is important for accounting and legal purposes, it does not necessarily reflect the market value or intrinsic value of a security.