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Par value is the face value of a security. Both stocks and bonds have a par value, which is set by the issuer of the security. Par value remains fixed for the life of a security, unlike market value, which fluctuates regularly. Because it influences interest and dividend payments, it’s a key factor for understanding your return on investment in bonds and preferred stock.
How Does Par Value Work?
The par value of a security is the original face value when it is issued. While bonds, common stock and preferred stock all carry a par value, it works differently for each type of security.
Par Value for Bonds
When you buy bonds, you’re lending money for a set amount of time to an issuer, like a government, municipality or corporation. The issuer promises to repay your initial investment—known as the principal—once the term is over, as well as pay you a set rate of interest over the life of the bond.
The principal in a bond investment may or may not be the same as the par value. Some bonds are sold at a discount, for instance, and pay back their par value at maturity. In any case, the fixed par value is used to calculate the bond’s fixed interest rate, which is referred to as its coupon.
A bond’s market value, meanwhile, is the price you’d pay to buy the bond in the secondary market from someone who isn’t the original issuer. Market value rises and falls as demand waxes and wanes. When you buy a bond in the secondary market, your effective rate of return differs from the fixed interest rate.
If you paid more than par value to buy a bond in the secondary market, the effective interest rate you’d earn on the bond would be lower than the coupon. If you paid less than par value for a bond, the effective interest you’d earn would be higher than the coupon.
Say you purchased a new bond from an issuer with a par value of $1,000—a very common par value for bonds—with a coupon of 4%. You would earn $40 a year. But if you bought the same bond on the secondary market for $1,200, your effective interest rate would be 3.33%, rather than 4%. You’d still earn the same $40 in interest—it would simply represent a smaller percentage of what you paid for your bond.
Why Par Value Matters for Bond Investors
Understanding par value is key to investing in bonds because bonds held to maturity only pay back the par value, or principal—not the market value you paid for them. This discrepancy means individual bonds may be better or worse investments depending on their coupon rate, the length of time to maturity and the price you’re able to buy them at.
To help them get a sense of how different bonds stack up, bond investors calculate a bond’s yield-to-maturity (YTM), or the rate of return you’d earn if you held a bond from the time you bought it (whenever that may be) to the end of its term. YTM factors in the market price of a bond, its par value as well as any interest you may earn along the way.
The YTM rate is often presented as a percentage. For example, a bond’s YTM may be 10%, meaning you can expect your money to grow by 10% when you consider the interest you’ll earn as well as the return of the par value.
If YTM is higher than the coupon rate, you’d make more money holding the bond to maturity than you would if you had bought it at face value. If the YTM is lower than the coupon rate, the opposite is true. YTM is also useful because it can allow you to determine which bonds would give you the best total ROI.
Yield-to-maturity can be hard to compute on your own, so consider using a calculator like this one.
Par Value for Preferred Stock
It’s helpful to think of preferred stock as a hybrid of bonds and common stock. Preferred stock represents equity in a company—a portion of ownership, like common stock. In addition, though, you are entitled to fixed dividend payments, like a bond’s fixed interest payments. Some common stock may also offer dividends, but these are normally at lower rates and are more likely to be foregone if a company has a hard quarter or year. While preferred stocks’ dividends are not guaranteed like bond interest payments, they are much less likely to be waived.
Like bond interest, preferred stock dividends are listed as a percentage amount often referred to as a coupon rate. This coupon rate is then multiplied by the preferred stock’s par value to calculate the dividend.
For instance, if you bought a newly issued share of preferred stock with a par value of $25 and a 5% coupon rate, you’d receive $1.25 per share in dividends per year. Similar to bonds, when you buy preferred stock on the secondary market, the effective interest rate changes depending on market value versus par value.
If you bought shares of our hypothetical preferred stock for $30, then you’d still receive $1.25 per share in dividends but your effective interest rate would fall to 4.2%.
Par Value for Common Stock
Common stock is issued with a par value, but it plays a negligible role in common stock trading for the average consumer. With common stocks, the par value simply represents a legally binding agreement that the company will not sell shares below a certain price, such as $0.01.
As the par value is often no more than a few pennies, it’s a formality to meet certain states’ legal requirements for securities or to help manage taxes for companies. Ultra-low par values also allow founders and early investors to buy shares in startups without expending a lot of capital. As with bonds and preferred stock, the final market value of a common stock has no relationship to its par value.
For example, the par value of common stock from Apple is $0.00001 per share. By contrast, the cost of a single share of Apple stock (AAPL) was $132.69 at the end of 2020.
In addition, common stock’s par value has no relationship to its dividend payment rate. Instead, common stock dividends are generally paid as a certain dollar value per share you own. Many people will then divide this value by the cost of a share to create its dividend yield.
To find the par value of a common stock, look at the shareholder’s equity section on the company’s balance sheet, which can be found in the quarterly or annual reports of publicly traded companies.
The Bottom Line
Even though par value may not be the price you pay for a security, it’s still important to be aware of as it may impact the amount of interest or dividend payments you receive.
Be sure to calculate your own yields-at-maturity or effective dividend payment rates to determine if the security you’re buying is a good deal for you. And to avoid this issue altogether, consider purchasing mutual funds or exchange-traded funds (ETFs) that contain hundreds or thousands of bonds.
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This takes the burden of research off of you and makes individual par values and interest rates less relevant as you benefit from the overall growth of a whole sector of stocks or bonds.