What it means
For bonds, par value is the anchor for everything else. The coupon is quoted as a percentage of par, the redemption amount equals par, and market prices are expressed relative to it, so a bond quoted at 98 costs 98% of its par value.
The relationship between price and par tells you how rates have moved. A bond trading below par is at a discount, which means market yields have risen above its coupon, while a bond above par is at a premium because its coupon is now better than what new issues offer.
For shares, par value is a legal artefact rather than an economic one. It represents the minimum consideration for which a share may be issued in some jurisdictions, and anything paid above it is recorded separately as share premium, or additional paid-in capital in United States terminology.
Because a high par value can restrict a company's ability to issue shares cheaply, most modern companies set it very low or use no-par shares where the law allows. The par figure on the balance sheet then bears no relation to what investors actually paid.
The practical warning is not to confuse par with worth. A bond's par value tells you what you get back if the issuer survives to maturity, and a share's par value tells you almost nothing at all about the value of the business.
In practice
Real-world examples.
Example
A pension fund buys a corporate bond at 92, well below its $1,000 par value, because market yields have risen since issue. It expects $1,000 per bond at maturity, so the $80 discount is part of its total return.
Example
A start-up issues 5,000,000 shares with a par value of $0.01 at $12 each. Share capital is recorded as $50,000 and share premium as $59,950,000, even though the company received $60,000,000 in total.
Example
A finance director explains to a new board member that the company's "$0.01 par ordinary shares" trading at $34 are not underpriced. The par value is a legal formality with no bearing on the share's worth.
Think of it
“Par value is the face value of a bond-what you get back at maturity.
Formula
Calculation
Bond proceeds = number of bonds x par value x (issue price / 100). Annual coupon = par value x coupon rate.
A manufacturer issues 20,000 bonds with a par value of $1,000 each and a 5% coupon, at an issue price of 98. Total par value is 20,000 x $1,000 = $20,000,000, and cash raised is 20,000 x $1,000 x 0.98 = $19,600,000, so the bonds are issued at a $400,000 discount.
The annual coupon is $1,000 x 5% = $50 per bond, or 20,000 x $50 = $1,000,000 a year for the issuer. At maturity the company repays par, meaning the full $20,000,000, so over a ten-year term the $400,000 discount is amortised at $400,000 / 10 = $40,000 a year, making the true annual cost $1,000,000 + $40,000 = $1,040,000 rather than the headline $1,000,000.Case study
Seen in the real world.
This is an illustrative and entirely fictional example. Thornbury Instruments, an invented scientific equipment maker, was incorporated decades ago with ordinary shares carrying a par value of $10 each. When the business fell on hard times and its shares traded at $6, its lawyers pointed out that it could not legally issue new shares below par, which blocked the rescue placing the board had planned.
The fictional company had to run a capital reduction to cut the par value to $0.05 before it could raise money, a process that took eleven weeks and cost about $95,000 in legal and court fees. During that delay a competitor completed its own fundraising and won a supply contract Thornbury had expected to keep.
The illustrative lesson is one that founders meet at incorporation and then forget: a high par value looks harmless when shares are worth far more, and becomes a genuine obstacle exactly when the company most needs to raise cash.
Watch out
Common mistakes.
- Treating a share's par value as an indication of what the share is worth, when it is usually a token legal amount.
- Assuming a bond bought below par is a bargain, when the discount normally just reflects a coupon that is now below market rates.
- Confusing par value with market value or book value, which are three different numbers that only coincide by accident.
Questions
People also ask.
Is par value the same as face value?
Yes, for bonds the two terms are used interchangeably to describe the amount repaid at maturity.
What happens if a bond is issued above par?
The issuer receives more than it repays at maturity, and that premium is amortised over the life of the bond, reducing the effective interest cost.
Can a company have shares with no par value?
Yes, many jurisdictions permit no-par shares, in which case the whole amount received is treated as share capital.
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