At Par
At face value is what the word at par means. A bond, preferred stock, or other financial instrument can trade at, below, or above par value.
In contrast to market value, which changes with market demand and interest rate swings, par value remains constant. When a security is issued, the par value is assigned. When securities were first issued in paper form, the par value was printed on the front of the instrument, thus the term "face value."
Understanding At the same time
Bonds and other financial instruments nearly never trade at par due to the ongoing change of interest rates. If current interest rates are above or below the bond's coupon rate, which is the interest rate it yields, the bond will not trade at par.
TAKEAWAYS IMPORTANT
The par value of a bond is the price at which it was issued.
Its value then varies depending on current interest rates and market demand.
At the maturity date of a bond, the owner will get its par value.
A bond that was trading at par would be quoted as 100, which means it was trading at 100% of its par value. A quotation of 99 indicates that it is now trading at 100% of its face value.
A New Relationship
If a corporation gets the face value of a new bond when it issues it, the bond is said to have been issued at par. The security is issued at a discount if the issuer gets less than the face value. The security is issued at a premium if the issuer gets more than the face value.
If fresh issues of these securities are issued at par, at a discount, or at a premium, the coupon rate, or yield, for bonds, and the dividend rate for preferred stocks, have a significant impact on whether they are issued at par, at a discount, or at a premium.
IMPORTANT: The par value of common stocks is generally a cent per share. This is an out-of-date idiom that has nothing to do with its market value.
A bond with a yield equal to its coupon is known as a par bond. For the risk of financing to the bond issuer, investors expect a return equivalent to the coupon.
At Par (Example)
If a corporation releases a bond with a 5% coupon, but the current yield on similar bonds is 10%, investors will pay less than par for the bond to make up for the rate discrepancy. To attract a buyer, the bond's value at maturity plus its yield up to that point must be at least 10%.
If current rates are lower, say 3%, an investor will be ready to pay more than par for a 5% bond. Due to the lower current yields, the investor will receive the coupon but will have to pay more for it.
Common Stock's Par Value
The concept of par value for common stock is archaic. The company's charter states that it will not sell its stock for less than its par value. The shares are then issued with a one-cent par value. This has no impact on the stock's current market value.
