PAR

Equal to the established value; face amount or stated value of a negotiable instrument, stock, or bond, and not the actual value it would receive on the open market. Bills of exchange, stocks, and similar instruments are at par when they sell for their stated value.
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Definition of PAR

PAR, in the context of finance, refers to the face amount or stated value of a negotiable instrument, such as a bond, stock, or bill of exchange, rather than the actual value it would receive on the open market. Essentially, when these financial instruments are sold for their stated value, they are said to be sold “at par.”

Examples

  1. Par Value of Stocks: A company’s common stock might have a par value of $1 per share. This is a nominal value and does not necessarily reflect the market value of the stock, which could be much higher or lower.

  2. Bonds at Par: A corporate bond might have a par value of $1000. If the bond is traded at its issuance price of $1000, it’s said to be trading at par.

  3. Bills of Exchange: A bill of exchange might have a face value of $5000. If it’s sold or traded for exactly $5000, it is considered to be sold at par.

Frequently Asked Questions (FAQs)

What is the difference between par value and market value?

Par value is the nominal value assigned to an instrument by the issuer, while market value is the current price at which the instrument can be bought or sold in the market.

Can stocks trade below par?

Yes, stocks can trade below par (also known as “trading at a discount”) or above par (referred to as “trading at a premium”), depending on market conditions and company performance.

Why do companies issue stocks with a par value?

Par value is a legal concept that represents the minimum price at which shares can be issued to protect creditors by ensuring that shareholders cannot pay less than this value for a company’s stock.

How is par value relevant in bonds?

For bonds, par value represents the amount to be repaid at maturity. It is also used to calculate periodic interest payments (coupons), which are a percentage of the par value.

  • Face Value: Another term for par value, typically used in the context of bonds.
  • Discount: When a financial instrument is sold for less than its par value.
  • Premium: When a financial instrument is sold for more than its par value.
  • Coupon Rate: The annual interest rate paid on a bond, expressed as a percentage of the par value.

Online References

Suggested Books for Further Studies

  • Fundamentals of Investments by Charles J. Corrado and Bradford D. Jordan
  • Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
  • Investment Analysis and Portfolio Management by Frank K. Reilly and Keith C. Brown

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