What is Par Value?
What is the definition of “par value” of shares or bonds?
What are the essential elements you should know!
In this article, we will break down the definition of Par Value so you know all there is to know about it!
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What Is Par Value
A “par value”, also known as nominal value, refers to the value of shares of stock issued by a corporation to its shareholders.
A corporation may assign a par value to its shares in its charter or articles of incorporation.
When a par value is stated for a certain class of shares in the corporate charter, it means that the company cannot sell the shares for a value below the par value.
You can consider the par value to represent the initial offering minimum issuance price.
The par value is “static” and does not change over time.
As such, we must not mistake the par value of stock with its market value that tends to fluctuate with time.
Let’s look at an example.
A company may assign a par value of $1 per share.
In that case, if 100,000 common shares are issued at a par value of $1, the company will record a receipt of $100,000 for the issuance of its common shares on its balance sheet.
As mentioned, it’s important to keep in mind that “par value” does not necessarily equal “market value”.
In other words, common shares could have a market value of $10 although a par value of $1 per share.
In our example here, if 100,000 shares are sold at $10, the company will report $100,000 as common stock on its balance sheet and $900,000 as contributed surplus or capital surplus.
Par Value Definition
According to the Business Development Bank of Canada, par value is defined as:
Par value is the value of a single common share as set by a corporation’s charter.
In essence, in finance and accounting, a par value is a value given by the corporation to its shares or represents the face value of bonds.
For example, a company may decide to attribute a par value of $1 per share, or $2, or any other dollar value.
Par Value of Shares
The par value of shares of stock refers to the value assigned to the shares as per the corporate charter.
For example, a company may assign a par value of $0.01, $0.10, $1.00 or any other value to shares of stock.
When a company assigns par values, typically, they are low.
Par values can also be assigned to preferred shares.
Using the preferred share par value and the expected dividend yield, an investor can calculate how much in dividends to expect per year.
For example, if the par value of the preferred shares is $1,000 and the dividend yield is 10%, the issuer must pay the preferred shareholders the sum of $100 per year.
Bond Par Value
The par value of a bond is the bond face value.
For example, if the bond face value is $1,000, that’s considered to be the par value of the bond.
Bonds are generally issued in denominations of either $100 or $1,000.
The par value of a bond is important as investors can determine that value they will receive upon its maturity.
In addition, using the par value of a bond, investors can also calculate the value of the coupon payments they expect during the term of the bond.
Importance of Par Values
Whether you are dealing with bonds or shares of stock, par value has some importance.
With respect to bonds, the par value or its face value is the basis for the bond pricing.
In other words, depending on the market rate of interest, bonds may trade above or below their par value.
From an investor’s point of view, they know that regardless of the bond market value, they can expect to receive the par value of the bond upon its maturity.
With regards to equity securities, corporations can choose to assign par value to their shares of stock to provide shareholders a guarantee of minimum value based on which shares may be issued from treasury.
In practice, many companies do not assign a par value to their common shares and if they do, generally, it will be a low nominal value.
Par Value Example
Let’s look at an example of how par value works.
Let’s assume Company ABC issues $1,000,000 of bonds having a par value of $1,000, thus 1,000 bond units at $1,000 per bond.
This means that Company ABC must pay back the value of $1,000 per bond to the lenders.
In this example, the bonds have a par value of $1,000 representing the amount Company ABC, as a borrower, is obligated to pay back to the bondholders.
Let’s now look at an example of the par value of shares of stock.
Let’s assume Company ABC sells1,000 common shares for a market value of $100 per share and each share has a par value of $10.
Par Value Meaning Takeaways
So what is the meaning of Par Value?
What is the financial definition of ‘par value’?
Let’s look at a summary of our findings.
Define Par Value
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