Does Par Value Change for Stocks and Bonds?

Par value is a financial term associated with both stocks and bonds, representing a nominal or face value assigned to these instruments. Its meaning and relevance vary depending on whether it applies to equity or debt securities.

Defining Par Value

For common stock, par value is an arbitrary, nominal figure, often set at a very low amount, such as $0.01 or $1 per share. Historically, this value served to establish a minimum price for initial offerings and to ensure a legal capital floor for creditor protection. Many companies today issue “no-par stock,” which does not have a designated par value, or use a “stated value” as an alternative.

In contrast, the par value for preferred stock typically holds more financial significance. This value often serves as the basis for calculating the fixed dividend payments preferred stockholders receive. For instance, a preferred stock with a $100 par value and a 5% dividend rate would pay $5 annually per share. The par value also commonly represents the redemption price, which is the amount the issuing company might pay to repurchase the preferred shares.

For bonds, par value, also known as face value or principal amount, is the amount the issuer promises to repay bondholders at maturity. This value is typically standardized, with $1,000 being a common par value for corporate bonds, though municipal bonds often have a par value of $5,000. The par value of a bond is also the basis for calculating the interest payments, or coupons, that the bondholder receives periodically.

Par Value’s Fixed Nature

Once a par value is established for a specific stock or bond at the time of its issuance, it generally remains fixed for the life of that security. This nominal value does not change, regardless of market fluctuations. For stocks, while the market price can rise and fall constantly based on supply and demand, the par value assigned to each share originally does not fluctuate.

Corporate actions, such as stock splits or reverse stock splits, do not alter the par value of an individual share. Instead, these actions change the number of outstanding shares and, consequently, adjust the par value per share for the newly structured shares in a way that maintains the total par value of all outstanding shares. For example, a two-for-one stock split might reduce the par value per share by half, but it also doubles the number of shares, keeping the total par value consistent.

Similarly, a bond’s par value is fixed at its issuance and represents the principal amount that will be repaid at maturity. Its market price will fluctuate above or below this par value based on prevailing interest rates, the issuer’s creditworthiness, and other market conditions. However, these market price movements do not affect the bond’s par value, which remains the contractual amount due at the end of its term.

Importance and Misconceptions of Par Value

The importance of par value, particularly for common stock, has diminished in modern corporate finance. With the widespread adoption of “no-par stock” and the market’s focus on trading prices, par value is rarely an indicator of a common stock’s worth or its trading price. Its primary role for common stock is limited to accounting for legal capital on a company’s balance sheet, where it represents a minimal amount of equity that cannot be distributed to shareholders.

Despite its reduced relevance for common stock, par value holds significance for other financial instruments. For preferred stock, it is used for calculating fixed dividend payments and serves as the redemption price. For bonds, par value defines the principal amount to be repaid at maturity and forms the basis for calculating regular interest payments.

A common misconception is confusing par value with market value, book value, or intrinsic value. Par value is a nominal, static figure set at issuance, while market value is the fluctuating price at which a security trades in the open market. Book value reflects a company’s assets minus liabilities, and intrinsic value is an analyst’s estimate of a security’s true worth.