Par value: Overview, definition, and example
What is par value?
Par value refers to the nominal or face value of a stock, bond, or other security as stated in the corporate charter or issued document. It is the value at which a security is initially issued and does not necessarily reflect its market value, which can fluctuate based on demand, performance, or market conditions. For stocks, par value is often a very low figure, such as $0.01 per share, and serves primarily as a legal concept rather than an indication of the stock’s actual worth in the marketplace.
For example, a company may issue stock with a par value of $1 per share, but the market value of the stock may be much higher based on investor demand and company performance.
Why is par value important?
Par value is important because it establishes a baseline for the legal structure of a company’s stock and provides a reference point for accounting purposes. For bond issues, the par value is the amount that will be paid back to bondholders at maturity, excluding any interest payments. For stocks, par value can impact how a company’s equity is recorded in its financial statements, but it does not directly affect the market value of the shares.
In practice, par value is largely symbolic for common stocks, as most shares are issued at a price far above their par value. However, it plays a key role in determining the initial legal framework for stock issuance and the company’s capital structure.
Understanding par value through an example
Imagine a company decides to issue 1,000 shares of common stock with a par value of $1 per share. While the par value of each share is $1, the company might sell the shares for $10 each to investors. In this case, the total par value of the company’s stock issuance is $1,000 (1,000 shares × $1 par value), but the company will receive $10,000 in total from investors (1,000 shares × $10 sale price).
In another example, a company may issue a bond with a par value of $1,000. This bond will be repaid at its par value, or $1,000, when it matures, regardless of any changes in the bond’s market value during its term.
An example of a par value clause
Here’s how a par value clause might appear in a corporate charter or securities agreement:
"The Corporation is authorized to issue 10,000,000 shares of Common Stock with a par value of $0.01 per share. The shares shall be issued at such price as the Board of Directors shall determine, provided that the issuance price shall not be less than the par value."
Conclusion
Par value is a key concept in the legal and accounting framework of stock and bond issuance. While it may not directly influence the market value of securities, it plays a role in defining the company’s equity structure and is important for regulatory and accounting purposes. Understanding par value helps businesses and investors recognize the nominal value of securities and its implications for financial reporting and capital structure.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.