What is Below Par?
In the bond world, below par means 'below face value.' Face value is the amount the issuer promises to pay the bondholder when the bond matures.
How Does Below Par Work?
Let's assume Company XYZ issues $10 million in bonds to the public. It may do so by issuing 10,000 bonds, each with a $1,000 face value. That means that when each bond matures, the holder will receive the par value of $1,000. Most corporate bonds have $1,000 face values, but municipal bonds often have $5,000 par values, and federal bonds often have $10,000 par values.
Now let’s assume that three months have gone by, and the bonds are trading between buyers and sellers in the bond market. Because Company XYZ has recently had to lay off workers and cut its marketing program because it is running short of cash, the company has become riskier. This, in turn, means that the company is less likely to pay off its debt when it comes due. Accordingly, the bonds are worth less, say, $800 each. The bond markets express this price as a percentage of par value, so these bonds are trading at 0.8, or below par. If the bonds were still worth $1,000 each, they would be 'trading at 100' or 'at par.'
Par value has little significance for equities because it generally does not influence the stock price itself. The par values for stocks are typically $0.01 per share and are set forth in the issuer's articles of incorporation. For preferred stock, however, par values may be higher because they are often used to calculate dividends.
Why Does Below Par Matter?
For bonds, par value is a pricing benchmark. When the bond's price is below the par value, the bond is considered 'discounted'; when the bond's price is above the par value, the bond is considered 'at a premium.'