In finance and accounting, par value is a term that is used for face value or stated value. The expressions at par (at the par value), over par (over par value) and under par (under par value) have been derived from par value itself. In this post, we will take a closer look at par value, what it entails and how you can calculate it.
Par Value: Key Facts
What is Par Value?
Par Value is the nominal or face value of a bond, share of stock, or coupon. It is always mentioned on the bond/stock certificate. The lender issues the certificate and gives it to a borrower. In another scenario, the certificate can be issued by a corporate issuer and given to an investor. The par value is always a static value and whatever is determined at the time of issuance, remains. It doesn’t fluctuate. A bond’s par value is always the dollar amount indicated on the certificate. The interest calculation and actual maturity amount with maturity date are also set. A share of stock’s par value is the minimum contribution amount made by investors to purchase one share at the time of issue. Let’s find out more about par value with an example.
Let’s assume that Company A issues 100,000 bonds to the public worth $100M and all the bonds are issued at a par value of $1,000. Upon maturity, the company will pay $1,000 back to the lender.
In the case of shares of stocks, Company A announces that it will offer 3000 shares of common stock and each stock will have a par value of $1. Once that is set, that is the minimum price for the sale of shares.
What is the Importance of Par Value?
For a company that issues the bond, the par value is a nice pricing benchmark. When the bond gets traded, the market price of the bond may be above or below par value. That depends on factors like the bond’s credit status and the interest rate levels. A bond that trades above par is sold at a premium and offers a coupon rate higher than the prevailing interest rates. As the return is expected to be high, investors tend to pay more. A bond that is trading below par on the other hand, is on a discount trade. It also has a lower interest rate than the prevailing market rates and it is sold at a lower price.
Par value is important for entrepreneurs as well. Especially the ones who are looking forward to starting a firm. The capitalization target can be easily configured if the company sets a value for each stock offered. Selling stocks at prices above the par value results in the creation of additional paid-in capital, reflected in the books of the company. Even though the fluctuating market price of stocks doesn’t impact books, par value has a legal bind on part of the company to its investors. It ensures that no shares are sold at a lower price than the par value.
Par Value Formula:
A company’s stockholding is mentioned on the balance sheet as stockholders’ equity.
The first part of stockholders’ equity is “Paid in Capital,” which is also known as the amount invested by stockholders. The second part is called “Retained Earnings”. This is taken from the company’s net income.
After the company issues the shares with a certain par value, the total book value of equity is recorded using this formula:
Book Value = Par Value + Additional Paid in Capital +Retained Earning
In this formula, these are the descriptions for further clarity:
Common stock at par = par value * number of shares issued
Additional paid-in capital= number of shares* (amount at which shares issued – par value)
Retained earning = Net Income – dividend
What are Shares at No Par Value?
Unless it’s required by law, companies are allowed to issue no par value shares. This essentially takes legal obligations away from the corporations and that’s not that great for debt holders. However, the par value of shares is usually so low that a no par value share won’t make any noticeable difference in the real world.
What are the benefits of knowing the Par Value?
Knowing and understanding par value is crucial for any business owner prior to establishing a firm. Here are some of its distinct benefits:
- The par value is a good stock price benchmark as the price can’t go below that.
- Back in the day, par value used to be a benchmark for the company’s liability towards its stockholders. Low par value helps companies stay away from contingent liabilities.
What are the limitations of par value?
- In essence, par value is nothing but a notional number. It doesn’t say anything about the shares’ market value. When it comes to stock market investing, the market value is what matters more.
- Par values of the bond, in general, are more relevant. However, it is usually so low that it has virtually no impact on the book value.
- Par value usually has no impact on the stock holding/market price.
- Even though it’s important for a business owner to be aware of the par value prior to raising capital, it doesn’t really affect the book or market value much.
- Par value isn’t really an accurate representation of the book or market value of equity.
Par Value: Conclusion
So those were the basics of par value. Hopefully, you have a clearer idea of the concept now and will be able to use it better in finance and accounting.