What is ‘Par’
Short for “par value,” par can refer to bonds, preferred stock, common stock or currencies, with different meanings depending on the context. Par most commonly refers to bonds, in which case it means the face value, or value at which the bond will be redeemed at maturity. This is usually $1,000 for corporate issues and can be more for government issues. A bond can trade above or below par, reflecting the broader interest rate environment and the issuer’s perceived credit worthiness.
Explaining ‘Par’
Bonds
In its most common usage, par value applies to bonds. The term refers to the face value of the bond, that is, the value at which the issuer will redeem the bond at maturity (assuming it does not default). Most bonds are issued at par value, but this is not always the case: discount bonds can be issued below par value, but must be redeemed at that value. Par value for corporate bond issues is usually $1,000. Government issues can have higher par values.
Preferred Stock
Preferred stock is equity, but bears similarities to a debt instrument. Preferred stock holders have priority over common shareholders when it comes to claiming a bankrupt company’s assets, though bond holders have priority over them. Preferred stock generally pays higher dividends, which must be paid in full before common stock holders can receive theirs; the trade-off is that preferred shares lack voting rights.
Common Stock
Unlike bonds and preferred stock, the par value of common stock (also known as ordinary shares) has no bearing on its market value. Increasingly, common stock issues have no par value. When they do, it is often just $0.01. Par value is the minimum legal amount of shareholder equity a company must maintain, meaning that dividend payments cannot reduce it below that level. This requirement afforded a level of protection to creditors when markets were unregulated, but is now largely meaningless. For example, McDonald’s Corp’s (MCD) balance sheet listed its common stock as $16.6 million in 2012, 2013 and 2014; the company’s market capitalization was recently (October 2015) around $97 billion, and has fluctuated a great deal in recent years without affecting the par value-based common stock account.
Currencies
For currencies, “par” means equal value. If a government decides to issue a new currency, they may issue it at par to the old one, that is, at a 1-to-1 exchange rate. The term can also refer to pegged currencies: the Cuban convertible peso (CUC), one of the country’s two official currencies, is nominally pegged to the U.S. dollar at a 1-to-1 exchange rate, though a 10% tax is applied to dollar conversions (other currencies are exempt).
Further Reading
- An empirical comparison of published replication research in accounting, economics, finance, management, and marketing – www.sciencedirect.com [PDF]
- The normative economics of health care finance and provision – www.jstor.org [PDF]
- The transformation of business finance into financial economics: The roles of academic expansion and changes in US capital markets – www.sciencedirect.com [PDF]
- Testing for nonlinear unit roots in the presence of a structural break with an application to the qualified PPP during the 1997 Asian financial crisis – onlinelibrary.wiley.com [PDF]
- The economics of Islamic finance and securitization – jsf.pm-research.com [PDF]
