When you purchase bonds or stocks, the market determines the price, but not the inherent value. The face value, or par value, of a financial instrument is set at issue and remains the same over the course of its existence. Knowing the influence of a financial instrument’s par value on its price can be important, so if you are confused by the difference between the price and inherent value of an investment or any other issue involving par value, it may help to speak with a Priori investment and securities lawyer.
What Is Par Value?
Par value is the face value of a stock, bond or other fixed-income instrument. The par value defines what the issuer has an obligation to pay out.
Par Value for Bonds
Par value for bonds establishes not only its maturity value but also the dollar value of coupon payments. A corporate bond’s par value is generally set at $100 or $1,000. Municipal bonds often have higher par values -- typically set at $5,000 -- and par value of federal bonds is even higher -- generally set at $10,000. Coupon payments, or yearly payments on the bond, will pay out at the established coupon rate. For example, a bond with a $100 par value and a coupon rate of 5% will pay out $5 annually. The par value is intrinsically tied to the market value of the bond. The same is true of many other fixed-income financial instruments.
Par Value for Stocks
Par value for stocks, on the other hand, generally has little relation to the market value. Most shares have negligible par value and in some states shares are permitted to have no par value at all. The share price is determined by market factors, such as industry trends and company profits, not the underlying par value of the stock.
Why Par Value Matters
Par value is incredibly important for bonds, because it acts as a pricing benchmark. When bonds are traded, the par value and the coupon rate establish whether it is at, above, or below market value. For bonds, while the par value is not necessarily the price a bond can actually be bought for on the market, par value is still a significant driver of value. For securities, par value is less important, especially in states where shares can be legally issues with no par value.
At Par, Above Par, Below Par
Because a bond’s coupon rate is fixed, it can become an advantageous investment or not later compared to the interest rates in the economy. This comparison—and thus how bonds can be traded—is described as being at par if the coupon rate and interest rates are the same. A bond with a coupon rate above the standard interest rate will be above par and the price can be higher for a competitive yield. Similarly, a bond with a coupon rate below the standard interest rate will be below par and priced lower accordingly.
An additional benefit of buying a taxable bond above par is that the premium can be amortized over the remaining life of the bond. This means the taxable income is reduced by offsetting the interest.
What does it mean when a bond trades at a premium vs. at a discount?
A bond trading above par is trading at a premium, while a bond trading below par is trading at a discount.