What Does Par Mean in Accounting for Stocks and Bonds?

Par value is a foundational accounting term that represents a nominal or face value assigned to certain financial instruments. Established at the time a security is issued, it remains fixed regardless of market fluctuations. While its real-world economic relevance has evolved, it continues to serve specific accounting and legal purposes.

Par Value in Stocks

Par value, when applied to shares of stock, refers to a nominal amount assigned to each share, typically stated in a company’s corporate charter. Historically, this value served as a legal minimum capital requirement for the protection of creditors. While its significance as a creditor safeguard has lessened with modern regulations, it still influences how equity is recorded in accounting.

When a company issues common or preferred stock with a par value, the accounting treatment distinguishes between the par value and any amount received above it. The par value portion of the proceeds is credited to the Common Stock (or Preferred Stock) account, while the excess amount is recorded in a separate account called “Additional Paid-in Capital” (APIC). For instance, if a company issues 1,000 shares of common stock with a $1 par value for $10 per share, the cash received is $10,000. The journal entry to record this issuance would involve a debit to Cash for $10,000. There would be a credit to Common Stock for $1,000 (1,000 shares x $1 par value) and a credit to Additional Paid-in Capital for $9,000 (the $10,000 received less the $1,000 par value).

Par Value in Bonds

For bonds, par value is also known as face value or maturity value, representing the principal amount the bond issuer promises to repay to the bondholder at the bond’s maturity date. This fixed amount is also the basis for calculating the bond’s periodic interest payments, known as coupon payments. For example, a bond with a $1,000 par value and a 5% annual coupon rate would pay $50 in interest each year (5% of $1,000).

Bonds can be issued at par, at a premium, or at a discount, depending on the relationship between the bond’s stated coupon rate and the prevailing market interest rate at the time of issuance. If the coupon rate equals the market interest rate, the bond is issued at par, meaning its selling price is equal to its face value. The journal entry for issuing a bond at par debits Cash and credits Bonds Payable for the total face amount of the bond issue. For instance, if a company issues $100,000 of bonds at par, the entry would be a debit to Cash for $100,000 and a credit to Bonds Payable for $100,000.

When a bond’s coupon rate is higher than the market interest rate, it will be issued at a premium (above par value). Conversely, if the coupon rate is lower than the market interest rate, the bond will be issued at a discount (below par value). The par value remains the amount that will be repaid to the investor at maturity.

The Significance of Par Value

Par value holds significance in accounting by providing a structured framework for recording financial instruments, even if its economic meaning has diminished for stocks. For shares of stock, par value distinguishes between the legal capital and additional paid-in capital. Historically, this distinction aimed to protect creditors. While many states now permit no-par value shares, par value, where required, still defines this legal capital baseline.

For bonds, par value is important as it directly dictates both the principal amount to be repaid at maturity and the basis for calculating regular interest payments. It serves as the fixed reference point for the bond’s contractual obligations.

Par value is a fixed, nominal amount set at issuance and should not be confused with market value. Market value, for both stocks and bonds, is the price at which the security trades in the open market, constantly fluctuating based on supply and demand, economic conditions, and the issuer’s financial health. While a bond’s market value may move closer to its par value as it approaches maturity, a stock’s market value typically bears little to no relation to its par value, which is often set at a very low amount, like a penny.