Par value is the minimum amount at which a market instrument is issued to investors. It is also referred to as face or nominal value.
Par value is a primary component in the context of fixed-income securities such as bonds, debentures, etc. It is because this value signifies a contractual agreement between the issuing body and the lender. According to this agreement, issuing authority of a fixed-income security is liable to repay the lender at the par value of securities they hold on the maturity date.
For instance, if a company issues bonds with a par value of Rs. 100 per bond and a lender holds 1000 such securities, at maturity, the organisation is liable to repay Rs. 1 Lakh to such lender.
In the context of market-linked securities such as equity shares, par value holds little relevance because the par value of shares does not affect its prices in the stock market. However, under no circumstance can a stock be traded below its par value.
It is mentioned in security certificates and a company’s Articles of Association. This amount does not change with a change in market conditions but stays static as long as security is traded in the open market.
Par value or face value holds varying significance for different categories of securities. Consequently, their treatment with regard to these securities also varies.
Par value of stocks is the minimum amount at which a company can sell its shares to the public. Stocks are how companies accumulate equity or own capital. Hence, the par value of stocks suggests the minimum amount a company can raise as its equity capital if it sells all its stocks in the market.
It is an archaic concept when it comes to stocks, as it does not affect the prices of shares in any way. Thus, it has been reduced to a mere formality that certain companies follow. Companies can either choose to set a par value for their stocks or offer it to the public without any stipulated par value. Stocks that do not come with a stipulated par value have ‘No par value’ written on their certificates.
Since it holds no particular significance in how stocks perform in the secondary market, companies that do issue par stocks, do so at an extremely low value. This adjustment allows companies to minimise their as well as shareholders’ contractual obligations, as par value inherently carries a two-way binding contract between an organisation and its shareholders.
Furthermore, when a company sets a significantly low par value, it is intended as a providential measure. It might be so that a company’s share prices fall and thereby, such stocks can only be traded in the penny stock range. Hence, setting a low par value would allow trading of such stocks even if their share prices fall.
It plays a pivotal role in the case of bonds. It signifies that an issuing body would repay lenders at the par value of bonds they are holding at maturity. Bonds can be issued at par, below par, or above par, depending on the prevailing interest rates in the economy.
Other terms used for such issuance are at a premium or a discount. If a bond’s face value is Rs. 500 and is traded at Rs. 520; it is selling at a premium. Conversely, if the same bond is traded at Rs. 480, it is selling at a discount. It primarily depends on whether the coupon rate of a bond agrees or disagrees with the current interest rates offered in the economy. The coupon rate or interest rate of a bond is the compensation bondholders receive for loaning to an issuing body and is distributed periodically.
A bond with a coupon rate of 7% being traded in an economy that features a prevailing interest rate of 7% will be trading at par. Contrarily, in an economy featuring 8% interest rates, a bond with a 7% coupon rate would trade at a discount. Since investors can earn higher interest in other kindred investment or deposit options, such a bond’s value drops causing it to trade at a discount. On the other hand, if a bond offers a coupon rate of 7% in an economy where prevailing interest rates are 6%, it would be trading at a premium.
Nevertheless, irrespective of whether a bond is trading at par, at a discount, or a premium, the issuing body shall only repay the par value at maturity.
There are several types of bonds, namely, government bonds, corporate bonds, and municipal bonds, and each type comes with a par value.
Par value of preferred stocks is the minimum amount at which preference shares can be sold to shareholders. It is also the amount based on which dividends are paid out to shareholders.
Par value was primarily introduced with the intent to safeguard investors’ interest by ensuring that no one receives favourable treatment with lower prices for shares. Furthermore, it also bound the shareholders with organisations and their associated entities.
For instance, if a group of shareholders pays a price lower than the par value and subsequently the concerned company is unable to meet its financial obligations, creditors are allowed to hold such shareholders legally accountable for the difference in paid-up price and value of par shares. On the other hand, if prices of stocks dwindle lower than their par value, such a concerned company is liable to pay the difference to its shareholders.
Therefore, to avoid these theoretical obligations, companies often issue their stocks at extremely low value. Apple Inc., for instance, has set the par value of its shares at $0.00001.
As mentioned previously, the par value of bonds is a significant component that safeguards bondholders’ interests. Par value denotes a contractual agreement between bondholders and issuing bodies, wherein the latter is liable to repay the former at par value on the maturity date.
Furthermore, it allows companies to regulate effective interest rates on bonds as per their price fluctuation in the open market. If the price of a bond is higher than its par value, the effective interest rate will go up. Conversely, if the price of a bond is lower than its par value, its effective interest rate would go down.
Consider this par value example: Company A set the par value for its shares at Rs. 1,000, offering a coupon rate of 7%. Hence, on every bond, it would pay an interest of Rs. 70. If a trader buys it from the open market at Rs. 900, he/she would still receive Rs. 70 as interest, but the effective rate would go up to {(70/900) * 100} or 7.78%.
The difference between the market price and par value of securities is elucidated in the table below.
| Par Value | Market Value |
| It is the value below which a security cannot be traded in the open market. | It is the price at which securities are traded in the open market at any point in time. |
| It remains static. | It fluctuates according to market conditions. |
| A company doesn’t mandatorily need to set a par value for its stocks. | Every security trading in the open market is associated with a market value. |
Investors should keep an eye on the par value of securities, especially bonds, to determine whether the returns generated fulfil their financial objectives. It is because interest on bonds and stocks is paid based on its par value.