Par Value Meaning for Stocks and Bonds

The “par value” of a security is the value assigned to it when it is first legally created, and is separate from the “market value” at which that security is bought and sold. The term is mostly used in the context of stocks and bonds, and is sometimes referred to as “face value”. In this article, we’ll explore the origins of this term and how it is used today in different parts of finance.

Par Value of Bonds

One of the main areas where par value is used is in the world of bonds, where it refers to the amount of principal that is returned to the bondholder once the bond reaches its maturity date. For corporate and municipal bonds, this par value is typically $1,000, whereas for federal government bonds it is typically $10,000.

Key points to remember about par value in the context of bonds include:

• The par value is used to determine the bond’s coupon payments, which are the interest payments made to the bondholder.
  
• For instance, if a bond has a par value of $1,000 and a 5% annual coupon, the bondholder would receive $50 each year in coupon payments.
  
• The par value stays the same no matter what happens to the company or the market. The market price of the bond could change, but the par value would remain stable.

This last point is especially important. Bonds can be sold in the secondary market all the time, and their price will change based on factors such as interest rates or the issuer’s creditworthiness. But no matter what changes may occur, the par value always stays the same.

By anchoring the bond's income stream to the par value, investors are offered a measure of stability in a market environment that is otherwise prone to change.

Par Value of Stocks

When we move from bonds to stocks, the concept of par value takes on a different meaning. It is typically set as a very low amount and represents the minimum price at which a company agrees to issue its shares. This number is typically less than $1.00. This number is often very different from the price those shares trade at today.

For example, consider the case of Alphabet Inc., the parent company of Google. In their annual 10-K filing for the year ended December 31st, 2022, Alphabet states that the par value of their common stock is $0.001. However, during 2022 their shares’ actual market value fluctuated between roughly $85 and $150 per share, vastly more than their par value.

History of Par Value and Stocks

At this point, you might wonder why the par value is necessary for stocks. To understand this better, it’s helpful to know about the history of par value as it relates to stocks. In the past, if a company went bankrupt and it could not pay off its debts by selling its assets, the shareholders could be held personally liable up to the par value of their shares.  This is because the par value was seen as the amount of capital that a company was expected to keep within the business as a safety net for creditors.

For instance, if the par value of a share was $10 and the company went bankrupt and could only cover $7 of that par value from its assets, the shareholders could potentially be liable for the remaining $3.

To reduce this potential liability for shareholders, companies began to set very low par values for their shares. This way, even if the company did go bankrupt, the maximum amount a shareholder could be held liable for (the par value) would be very small. This practice has continued even though laws that hold shareholders personally liable have largely been abolished.

A Real-World Example of Par Value

Let’s return to our example of Alphabet Inc. In 2022, Alphabet repurchased about $59 billion of its own shares, meaning that it bought those shares at their current market prices, not their par values.

What would have happened if, instead of buying back shares, Alphabet had instead issued new shares? In that instance, both of the following would have occurred:

1. The company would have sold the shares for far more than their par value, perhaps somewhere in the $85 to $150 range. The proceeds from these sales, after deducting all applicable costs involved in the sale, would have added to the company’s cash holdings.
2. At the same, the company would technically increase its “share capital”, which is equal to the number of shares issued multiplied by the par value per share.

For example, suppose that Alphabet sold 10 million shares at a market price of $150 per share. The following would happen from the sale:

1. The gross proceeds from the sale would be $1.5 billion (10 million shares * $150 per share)
2. The increase in share capital would only be $10,000 (10 million shares * the par value of $0.001 per share). 

This large difference in values reflects the fact that the use of par values in stocks (though still in effect) is no longer as relevant as it once was.

Par Value vs. Market Value: What’s the Difference?

As you can see from our Alphabet Inc. example, par value and market value are two very different things. Par value is set when the security is issued, and remains unchanged thereafter. Market value, on the other hand, is always changing based on factors such as the perceived prospects or creditworthiness of the issuer.

Although in stocks, the difference between par value and market value will often be extremely large, this is less true in the case of bonds. Although the price of a bond can change based on interest rates, credit risks, investor sentiment, and other factors, it is usually much closer to its par value compared to stocks.

For example, suppose we buy a bond with a par value of $1,000 and a coupon of 5%, at a time when the market interest rate for similar securities is also 5%. If market interest rates were to increase to 10% during the term of our bond, the market price of our bond would typically decline by around 50% (assuming no changes in other factors such as the issuer’s creditworthiness). In that scenario, the market value of our bond would be $500 while its par value would still be $1,000. 

While this is certainly a meaningful difference, it is still a much smaller gap than what typically exists between the par value and market value of companies’ shares.

Summary of Key Points

In summary, par value means different things depending on whether you are talking about stocks or bonds.

• For stocks: It is today mostly a legal formality, with limited real-world implications. It is often set at a very low level due to legal and accounting necessities.
• For bonds: It is a much more practical concept that is used for determining interest payments and the amount of principal repaid to the lender when the bond reaches the end of its term.

In both cases, par value and market value are different concepts. For stocks, the difference between them is typically very large, whereas with bonds the difference is smaller.

Additional Resources

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