What is Par Value?
Par value is the face value of a bond. It is the principal amount that the lender (investor) is lending to the borrower (issuer).
Par Value Example
Let's assume Company XYZ issues $1,000,000 in bonds to the public. It may do so by issuing 1,000 bonds, each with a $1,000 par value.
When each bond matures, the borrower will pay back the par value of $1,000 to the lender.
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.
Stock is also assigned a par value, though it is generally a very small, arbitrary value (usually $0.01) assigned to each share. Preferred stock may be assigned a higher par value because it is often used to calculate dividends.
Why Par Value is Important
For bonds, par value is an essential pricing benchmark. When the bond's price is below the par value, the bond is selling 'at a discount'; when the bond's price is above par value, the bond is selling 'at a premium.'
The difference between a bond's price and a bond's par value cannot be overemphasized. In fact, it's one of our 3 Most Deadly Misconceptions About Bonds.
Par value has little significance for equities because it generally does not influence the stock price itself. The cumulative par value of all the company's shares outstanding is reflected in the shareholders' equity section of the balance sheet.