Par value – What is par value?
Par value refers to the fixed monetary worth of financial instruments such as stocks, bonds, and currencies.
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Par value is sometimes called face value, nominal value, or stated value; it is also common to use the expressions ‘at par’, ‘below par’, and ‘above par’.
Par value vs. market value
Like par value, market value is an important concept for valuing financial assets and instruments. However, the two concepts are not the same. Two of the key differences between par and market value include:
- Par value is set when a stock or bond is sold, it then stays the same. On the other hand, market value is fluid - meaning that it can increase or decrease over time.
- Par value is set by the company issuing the stock or bond, whereas market value is determined by supply and demand within the market.
Because of the differences between par value and market value, the two concepts often result in very different valuations. Market value can be significantly higher or lower than par value, depending on how much the market is willing to pay at a specific point in time.
Par value and bonds
A bond is an agreed loan between two parties; when someone ‘issues’ a bond, they are borrowing money and agreeing to pay it back at a later date – this date is known as the point of maturity.
The par value of a bond is the amount of money that the bond issuer (the party borrowing the money) pays to the bondholder (the party loaning the money) at bond maturity.
Bonds do not have to be issued at par value. They might be issued at a premium (above par) or at a discount (below par), depending on interest rates. When interest rates are high, it is common for more bonds to be issued at a discount.
Par value and shares
When referring to stocks and shares, par value is the minimum amount that should be paid for a single share. In some countries, it is possible for a limited company to issue shares without setting a par value.
In the UK, the par value of shares is regulated by Section 542 of the Companies Act 2006. All stocks issued in the UK must have a fixed par value, and any share that does not have a fixed par or nominal value is considered void. According to Section 542, the par value of a stock can be in any currency.
Par value and currency
Although the concept of par value is most commonly used in the context of stock and bonds, it can sometimes refer to currency. When two currencies are ‘at par’, they are exchanged at equal value.
If currencies are exchanged at par value, it is usually for one of two reasons:
- A government has issued a new currency that is valued at the same rate as the old currency, or;
- A currency union is using a fixed exchange rate.
