Understanding Per Value

Par value, also known as face value or nominal value, is the stated value of a bond or other security as specified in the issuing document. It represents the amount that the issuer agrees to pay the bondholder at maturity, and it is also used to calculate interest payments. Here’s a more detailed look at par value:

Key Aspects of Par Value

1. Definition:

   • Par value is the amount printed on the bond certificate, which is the principal amount that will be returned to the bondholder when the bond matures.

2. Interest Payments:

   • The coupon payments (interest payments) on bonds are typically calculated based on the par value. For example, a bond with a par value of $1,000 and a coupon rate of 5% will pay $50 annually.

3. Bond Pricing:

   • Bonds can trade at different prices in the market:
     • At Par: If the bond is selling for its par value (e.g., $1,000), it is said to be trading at par.
     • Above Par (Premium): If the bond sells for more than its par value (e.g., $1,100), it is trading at a premium. This typically occurs when the bond’s coupon rate is higher than current market interest rates.
     • Below Par (Discount): If the bond sells for less than its par value (e.g., $900), it is trading at a discount. This usually happens when the bond's coupon rate is lower than the prevailing market rates.

4. Maturity:

   • At maturity, the issuer repays the par value to the bondholder, along with the final interest payment if applicable.

5. Equity Securities:

   • While par value is most commonly associated with bonds, it can also apply to stocks. In the context of equity securities, par value is the nominal value assigned to a share of stock and is often set very low (e.g., $0.01). It has little relevance to the stock’s market price.

Importance of Par Value

• Investor Perception: It helps investors gauge the bond's yield in relation to its market price.
• Financial Reporting: It provides a basis for accounting, as the par value is used to record the bond liability on the issuer’s balance sheet.
• Legal Requirement: In some jurisdictions, companies are required to issue shares with a stated par value, although many modern companies issue no-par stock.

Example

If you purchase a bond with a par value of $1,000 and a coupon rate of 4%, you will receive $40 annually (4% of $1,000) until the bond matures. If you hold the bond until maturity, you will receive the $1,000 back along with the final interest payment.