What it means
Par value, also called face value or nominal value, is the amount an issuer promises to repay a bondholder at maturity and the base on which coupon interest is calculated. It is a contractual number, fixed at issue, and it does not move when market sentiment moves.
That fixed anchor is exactly what makes it useful as a comparison point. A bond prices at par when the coupon rate it offers matches the return investors currently demand for that level of risk and that length of term.
If the coupon is higher than the market rate, buyers bid the price above par; if it is lower, the price falls below par. So a bond sitting at par is telling you the issuer priced the deal right on the day.
Bond prices are conventionally quoted as a percentage of face value rather than in dollars, which is why traders say a bond is at 100, at 103.5 or at 96. A quote of 100 means at par, anything above means a premium and anything below means a discount.
Once you know the convention, the vocabulary stops being mysterious. Shares have a par value too, though it is usually a token amount such as $0.01 set for legal reasons rather than economic ones.
When shares are issued for more than par, the excess is recorded separately as share premium or additional paid-in capital rather than as ordinary share capital. Confusing a share's par value with its worth is one of the quickest ways to misread a balance sheet.
For a finance team the practical question is whether new debt can be placed at par, because that keeps the arithmetic clean. Issuing at par means the cash received equals the liability recorded and the interest expense equals the coupon.
Issuing below par raises less cash than the company must eventually repay, and the shortfall has to be recognised over the life of the instrument. The phrase is also used loosely outside securities to mean on equal terms, as in two divisions performing on a par with each other.
That everyday use is harmless, but it is worth keeping the technical meaning separate when reading a financing document. In a term sheet, at par always means at face value.
In practice
Real-world examples.
Example
A utility company refinances $200,000,000 of maturing debt and instructs its banks to price the new notes at par so the accounting is straightforward. The coupon is set at 4.75% on the morning of pricing to match investor demand exactly. The treasurer reports to the board that the issue cleared at 100 with no discount.
Example
A software startup issues 1,000,000 ordinary shares with a par value of $0.001 each to an investor at $4.00 per share. Only $1,000 is recorded as share capital, and the remaining $3,999,000 goes to the share premium account. The founder is surprised until the finance lead explains that par value here is purely a legal formality.
Example
A corporate treasurer parks surplus cash in a money market fund that aims to hold its unit price at $1.00. Holding at par is the whole point of the product, so any drift below $1.00 would be treated as a serious event rather than a normal price movement.
Formula
Calculation
Price as a percentage of par = Market Price / Par Value x 100
A security is at par when this equals 100.
Worked example. Calderwood Bakeries issues $500,000 of five-year bonds with a par value of $1,000 each, which is 500 bonds, carrying a 5% annual coupon. Investors currently require 5% for similar risk, so the bonds price at exactly 100 and the company receives 500 x $1,000 = $500,000.
Annual interest = $500,000 x 5% = $25,000.
Total interest over five years = $25,000 x 5 = $125,000.
Amount repaid at maturity = $500,000.
Current yield = $25,000 / $500,000 x 100 = 5%, matching the coupon exactly because the bonds are at par.
Now suppose demand had been weaker and the bonds had priced at 98 instead. Proceeds would be 500 x $980 = $490,000, while Calderwood would still repay $500,000, leaving a $10,000 discount to be spread across the five years as extra finance cost.Case study
Seen in the real world.
Calderwood Bakeries is an illustrative, fictional regional baker created to show how pricing at par plays out in practice. When it decided to fund a new distribution centre, its finance director wanted a clean $500,000 bond issue rather than a bank facility with covenants attached. The advisers tested investor appetite and came back with a 5% coupon as the level that would clear at exactly face value.
Because the bonds went out at par, the accounting stayed simple: $500,000 of cash in, a $500,000 liability recorded, and a $25,000 interest charge each year with no discount or premium to unwind. The finance director could give the board a one-line summary of the cost of the money.
A year later, market rates fell to 4% and the same bonds started changing hands at around $1,045, a premium. Nothing had changed for Calderwood, which still paid $25,000 a year and still owed $500,000 at maturity, and this fictional sequence is a useful reminder that par is fixed while market price is not.
Watch out
Common mistakes.
- Believing a share's par value tells you what the share is worth. Par value on ordinary shares is usually a legal formality set at a fraction of a cent and has no relationship to market value.
- Assuming a bond trading at par has no risk. Price and credit risk are different things, and an issuer in trouble can see a bond fall from par very quickly.
- Reading a bond quote of 98 as $98. Bond prices are quoted as a percentage of face value, so 98 on a $1,000 bond means $980.
Questions
People also ask.
What does it mean if a bond is issued at par?
The issuer receives exactly the face value in cash and will repay exactly the face value at maturity, so the coupon rate and the effective interest rate are the same.
Can a bond move away from par and come back?
Yes, and it usually does, because prices converge back towards par as the maturity date approaches regardless of what rates did in between.
Is at par the same as at cost?
No, cost is what a particular buyer actually paid, while par is the fixed nominal amount stated in the instrument itself.
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