Unlike the market price, the par value of a financial instrument is a stable price determined at the time of issuance. While both stocks and bonds can have par values, they’re much more important for bond investors. Par value is the stated or face value of a financial instrument, primarily bonds and stocks. For bonds and other fixed-income assets, it shows the maturity value and the dollar value of the coupon (or interest) payments that are due to the bondholder. Also called nominal or original value, par value is the opposite of market value, which fluctuates every day. While U.S. Treasury or government agency securities provide substantial protection against credit risk, they do not protect investors against price changes due to changing interest rates.
Related Terms
Shares usually have no par value or very low par value, such as one cent per share. In the case of equity, par value has very little relation to the shares’ market price. Even if a company sets a low par value, it must still record this amount on its balance sheet under shareholders’ equity. Any amount investors pay above par value is categorized as additional paid-in capital (APIC). Par value is a fixed amount assigned to a stock or bond at issuance, while market value fluctuates based on investor demand, economic conditions, and company performance. At maturity, the issuer repays the bondholder the full par value of the bond.
Bonds
Calculating the value of a coupon bond factors in the annual or semi-annual coupon payment and the par value of the bond. While the par value of a corporate bond is usually stated as either $100 or $1,000, municipal bonds have par values of $5,000 and federal bonds often have $10,000 par values. One of the most important characteristics of a bond is its par value. The par value is the amount of money that bond issuers promise to repay bondholders at the maturity date of the bond.
Why Are Bond Prices Inversely Related to Interest Rates?
Bond valuation, in effect, is calculating the present value of a bond’s expected future coupon payments. The theoretical fair value of a bond is calculated by discounting the future value of its coupon payments by an appropriate discount rate. It’s issued by companies, governments, or their agencies when they need money. In return, they owe you the bond’s ‘par value’ and interest when the bond matures (that’s when it’s due). The par value of a corporate bond is $1,000 and represents the amount a bond issuer must pay bondholders for each bond owned on a bond’s maturity date. It’s similar to par on a golf course only you get money in your pocket rather than personal satisfaction.
When you buy a bond in the secondary market, your effective rate of return differs from the fixed interest rate. The calculations can get more complicated when there’s more than one coupon payment left for a bond. Additionally, market rates are constantly changing, so nailing down an exact price for a bond offering relative to similar offerings isn’t always possible. But it’s a framework for determining the market value of a particular bond. In this example, the two-year bond holder will receive par value plus 5% at maturity.
Why Is the Price of My Bond Different From Its Face Value?
- Companies must carefully structure their par values to comply with regulations, while investors should understand its impact on pricing, returns, and risk management.
- For example, if shares with a par value of $1 are sold for $5 each, $1 per share is recorded in the Common Stock account, and the remaining $4 per share is recorded in APIC.
- The difference between the purchase price and par value is the investor’s interest earned on the bond.
- She spent more than a decade as the contributing editor of J.K.Lasser’s Your Income Tax Guide and edited state specific legal treatises at ALM Media.
- The face value (FV) on a bond is particularly important for calculating the yield to maturity (YTM).
- The reason is that it is very rare for the market interest rate to equal the coupon rate of the bond.
An individual bond is a debt security issued by a government, corporation, or other entity. You’re essentially loaning money to the issuer in exchange for regular interest the par value of a bond is payments and the return of your original investment when the bond matures. For instance, zero-coupon bonds don’t have regular interest payments and amortized bonds don’t return principal at maturity.
Junk Bonds
This number plays a key role in financial reporting, legal compliance, and investor confidence. Many states require corporations to set a par value to establish the minimum price at which shares can be issued. On the other hand, bonds use par value to determine interest payments, ensuring bondholders receive the correct returns. The par value of stock has no relation to market value and, as a concept, is somewhat archaic.
