Par Value
Key Takeaways
- Par value is the face value of a bond, typically $1,000, returned at maturity
- Bonds trade at par, above par (premium), or below par (discount)
- For stocks, par value is a nominal legal designation with minimal practical significance
- Par value is the reference point for calculating coupon payments and yield metrics
Definition
Par value (also called face value or nominal value) has different meanings for bonds and stocks. For bonds, par value is the amount the issuer promises to repay at maturity — typically $1,000 for corporate and government bonds. It is the reference amount used to calculate coupon payments and is the price at which a bond is originally issued.
For stocks, par value is a minimal nominal value assigned to shares in the corporate charter, often $0.01 or $0.001 per share. It has little practical significance for stock investors and exists primarily for legal and accounting purposes.
In the bond market, par value is the anchor around which all pricing and yield calculations revolve. A bond is said to be trading at par when its market price equals $1,000, at a premium when above $1,000, and at a discount when below $1,000.
How It Works
For bonds, par value determines the coupon payment: Coupon Payment = Par Value × Coupon Rate. A $1,000 par bond with a 5% coupon pays $50 per year. At maturity, the bondholder receives the par value regardless of the market price paid. If you bought the bond at $950 (discount), you receive $1,000 at maturity for a $50 capital gain.
Bond prices are quoted as a percentage of par. A price of 98 means 98% of par, or $980. A price of 103 means 103% of par, or $1,030. This convention makes it easy to see whether a bond is at a premium or discount without knowing the specific par value.
For stocks, par value appears on the balance sheet as part of paid-in capital. If a company issues 1 million shares with $0.01 par value, the par value contribution is just $10,000. The remainder of the share price goes to additional paid-in capital. Par value for stocks has no bearing on market price or investment value.
Example
An investor buys a Treasury bond with 10 years to maturity, $1,000 par value, and 4% coupon for $920 (a discount). They will receive $40 per year in coupons ($20 every six months) plus $1,000 at maturity. The total return over 10 years: $400 in coupons + $80 capital gain (from $920 to $1,000) = $480, or approximately 4.75% annualized (YTM). The discount to par enhances total return beyond the 4% coupon rate.
Why It Matters
For bond investors, par value is fundamental to understanding bond pricing, coupon calculations, and return expectations. Whether a bond trades above or below par tells you immediately whether its YTM is above or below the coupon rate. This is essential information for making purchase decisions and comparing bonds.
The concept of returning to par at maturity provides certainty that stock investments lack. A bondholder who buys at a discount knows they will receive par value at maturity (assuming no default), providing a guaranteed capital gain on top of coupon income. This convergence to par as maturity approaches is called "pull to par."
Advantages
- Provides certainty of redemption amount for bonds at maturity
- Standardized reference point for bond pricing and yield calculations
- Pull to par provides predictable return component for discount bonds
- Simple, universally understood concept in fixed-income markets
Limitations
- For stocks, par value is largely meaningless in modern finance
- Bond par value does not reflect actual market value before maturity
- Does not account for credit risk — defaulted bonds may never return par
- Inflation erodes the real purchasing power of the par value received at maturity
Frequently Asked Questions
Related Terms
Browse more definitions in the financial terms glossary.