Par value definition
/What is Par Value for Stock?
Par value is the value assigned to a share of stock in a corporation’s charter. Historically, it established a minimum price at which shares could be issued. Today, companies commonly set par value at a nominal amount, such as $0.01 per share, because some state laws restrict sales below par. Other states permit no-par stock, eliminating this minimum entirely. Although par value has little economic significance today, corporations issuing par-value stock must record the par value of outstanding shares separately in stockholders’ equity. Stock certificates generally state either the assigned par value or indicate that the shares have no par value.
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What is Par Value for Preferred Stock?
The par value of preferred stock provides the base amount used to calculate its stated dividend. If a preferred share has a par value of $1,000 and a dividend rate of 5%, the issuer pays an annual dividend of $50 per share. This payment generally continues for as long as the preferred stock remains outstanding, subject to the stock’s specific terms. Consequently, par value helps investors determine the expected dividend amount, even when the stock’s market price differs substantially from par value.
Example of Par Value for Preferred Stock
A company issues 10,000 shares of preferred stock with a par value of $50 per share. The preferred stock pays a 6% annual dividend based on its par value. The annual dividend per share is calculated as follows:
$50 x 6% = $3 per share
Since the company issued 10,000 shares, the total annual dividend obligation is:
10,000 shares × $3= $30,000
Therefore, the company must pay $30,000 in dividends annually to preferred shareholders before its common stockholders receive any dividends.
What is Par Value for Bonds?
Par value is the stated face value of a bond, commonly $1,000. It determines the amount the issuer repays at maturity and serves as the basis for calculating stated interest payments. A $1,000 bond with a 10% stated rate pays $100 annually. Bonds can trade above or below par because of changes in market interest rates or credit quality. When purchased above par, the investor’s effective yield is lower than the stated rate; below par, the effective yield is higher.
Example of Par Value for Bonds
For example, ABC Company issues bonds having a $1,000 par value and 6% interest rate. An investor later buys an ABC bond on the open market for $800. ABC is still paying $60 in interest every year to whoever holds the bond. For the new investor, the effective interest rate on the bond is $60 interest ÷ $800 purchase price = 7.5%.
Par Value FAQs
How does par value affect retained earnings and dividends?
Par value does not directly affect retained earnings because it represents stated capital rather than accumulated profits. However, par value influences legal capital, which may restrict the portion of equity available for dividend distributions under state law. As a result, dividends can only be paid from retained earnings or surplus amounts that exceed stated capital.