Par Value - Explained
What is Par Value?
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What is Par Value?
The face value that a bond has is said to be its par value. It is significant for an instrument of fixed income and a bond. The reason of its importance is that the par value estimates the maturity value of a bond. The coupon payments have a dollar value. The par value also determines this dollar value. It can be generally one thousand US Dollars or one hundred US Dollars. A bond has a market value which can be lower or higher than its par value. It depends on multiple factors, including the credit status of a bond and the interest rates level. The shares also may or may not have a par value. In the perspective of shares, it is basically a stock value as mentioned in the corporate charter. Usually, shares do not have a par value. If they have, it is very low, say, one cent/share. As far as the par value of the equity is concerned, it has a very little connection with the market price of the shares. Other names of Par value are face value or nominal value.
How is Par Value Used?
Par value is one of the vital features of a certificate/bond. The one who issues bond commits to pay it back to the bondholder when the maturity date arrives. This amount of money is basically the par value. Thus, if we purchase a bond, we are actually giving a loan to its issuer and he is liable for its repayment. A bond or a certificate is fundamentally a written agreement for the same. It is not necessary that the bonds must have a par value when being issued. The issuer can sell it at a discount or a premium. It depends on the prevailing interest rate in the country. A premium bond is a kind of bond that holds more par value to trade. On the other hand, a bond that is traded less than the par value is a kind of bond known as a bond at a discount. When there are lower interest rates or trends in the economy, a big portion of certificates are traded at a premium (more than par value) whereas a big portion of certificates is issued at a discount in case of the higher interest rates, e.g. a bond having a face value as 1000 USD is recently traded at 1020 USD, it is at a premium. If it is traded as 950 USD, it means to be at a discount. An investor may purchase a taxable bond more than the par value, the premium, in this case, gradually liquidates over the rest of the bonds life. It offsets the amount of interest obtained from the bond. This way, the taxable income of an investor becomes less. People, who buy tax-free bonds at more par value, cannot avail premium amortization. A bonds coupon rate than the economy's interest rates determines that the bond will be traded at above, below or same par value. It means the payment of interest to the bondholder on a yearly or semi-yearly basis. It is basically a compensation to loan a certain amount of money to the bond issuer, such as a bond has 1000 USD par value and four percent coupon rate. The yearly coupon payments will be 4% x 1,000 = 40 USD. Now, suppose a bond has a 100 USD par value with four percent coupon rate. The yearly coupon payment will be 4% x 1,00 = 4 USD. When the coupon rate is four percent and the interest rate is also the same, the bond will be traded at the par value. This is because the rates are equal. If the interest rate moves to five percent, the bond value will come down, leading to trade on less than its par value. The reason is that it will now pay less interest rate to the bondholder than the high-interest rate of five percent. So, a lower coupon bonds price should come down to the same five percent offer to the investor. On the contrary, if the interest rate drops to three percent in the economy, the bond value will increase. Now, it will be traded at more par value. This is because the coupon rate of four percent is more attractive as compared to three percent. Whatever par value a bond has, whether premium or discounted, it will be repaid by the issuer to the investor when the maturity date is there. Like, if a person buys a bond for 950 USD and some other buys the same at 1020 USD. At the maturity date, both of them will get repayment of 1000 USD as the par value. Whereas the corporate bonds par value is generally given as 100 USD or 1000 USD. The par value of the municipal bonds is 5000 USD while the par value of the federal bonds is 10000 USD.
Par Value of Stocks
In some countries, the companies are not allowed to sell shares under their par value. In order to follow the state rules, for the stocks, most of the companies make a par value to the least amount, e.g. Apples shares have a par value of 0.00001 USD while Amazons stock has a par value of 0.01 USD. On the first public offering, they cannot sell their shares under the par value. Hence, the investors feel confident that nobody is going to get a treatment of favourable price. Some countries allow issuing stock without any par value. They have no arbitrary amount for their stock more than a company is allowed to sell. A bondholder can recognise no-par stocks on the shares because they contain no printed par value on them. The par value of the shares of a company is in the capital section of the shareholders balance sheet.
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