Par Value
Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate, as stated in the corporate charter.Stock certificates issued for purchased shares show the par value. The par value of shares, or the stated value per share, is the lowest legal price for which a company sells its shares.Par value is required for a bond or a fixed-income instrument and shows its maturity value and the dollar value of the coupon, or interest, payments due to the bondholder.
Definition: Face value, also known as nominal value or par value, refers to the value of a bond or the value of a stock certificate as specified in the company's charter. When purchasing stocks, the stock certificate will display the face value. The face value of a stock, or the par value per share, is the minimum legal price at which a company can sell its shares. For bonds or fixed-income instruments, the face value indicates the value at maturity and the interest or dollar value of interest to be paid to the bondholder.
Origin: The concept of face value originated in the early financial markets when stock and bond transactions primarily relied on paper certificates. At that time, face value was an important basis for determining the minimum trading price of stocks and bonds. As financial markets evolved, the practical significance of face value diminished, but it still retains its importance in legal and accounting contexts.
Categories and Characteristics: Face value can be divided into two main categories: the face value of stocks and the face value of bonds.
- Face value of stocks: This is the minimum price per share specified by the company when issuing stocks. Although the market price of stocks is usually much higher than the face value in modern markets, the face value still retains its importance in the company's charter and legal documents.
- Face value of bonds: This is the amount that the issuer must pay to the bondholder at maturity. The face value of bonds is typically $1,000 or $100, depending on the type and terms of the bond issuance.
Specific Cases:
- Case 1: A company issues a batch of common stock with a face value of $1 per share. Although these shares may trade at a much higher price in the market, the face value of each share remains $1 in the company's charter.
- Case 2: An investor purchases a corporate bond with a face value of $1,000 and a coupon rate of 5%. This means the investor will receive $50 in interest annually (5% of $1,000) and will receive the $1,000 principal at maturity.
Common Questions:
- What is the difference between face value and market value? Face value is the value specified by the company when issuing stocks or bonds, while market value is the actual trading price of the stock or bond in the market. There can be a significant difference between the two.
- Why is face value no longer important in modern markets? As financial markets have evolved, the market prices of stocks and bonds are more influenced by supply and demand and market sentiment, reducing the practical trading significance of face value. However, it still retains its importance in legal and accounting contexts.
