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Legal Definitions - Par
Definition of Par
The term "par" refers to the nominal or face value of a financial instrument, such as a bond or a share of stock, as stated by the issuer. When a security is trading "at par," its market price is exactly equal to this stated face value. If it trades "above par," its market price is higher than its face value; if it trades "below par," its market price is lower. This concept is fundamental for understanding how securities are valued and traded in financial markets.
- Example 1: Corporate Bonds
A large corporation issues new bonds, each with a face value (or par value) of $1,000. These bonds promise to pay interest over a set period and return the $1,000 principal at maturity. If, on the open market, investors are currently buying and selling these bonds for exactly $1,000 each, the bonds are said to be trading at par. This indicates that the market's perceived value of the bond, considering its interest rate and the issuer's creditworthiness, matches its original face value.
- Example 2: Preferred Stock Issuance
A growing technology company decides to issue preferred shares to raise capital. Each preferred share has a stated par value of $50. When the company initially sells these shares to institutional investors for $50 per share, they are being issued at par. This means the initial sale price aligns precisely with the nominal value assigned to each share. If, later, the company's prospects improve significantly, these same shares might trade on a secondary market for $55, meaning they are trading above par.
- Example 3: Mortgage-Backed Securities
A financial institution bundles thousands of home mortgages into a single investment product called a mortgage-backed security (MBS). This MBS has an aggregate principal amount, which can be considered its "par" value. If another investment firm purchases this MBS for an amount equal to the total outstanding principal of all the underlying mortgages, the transaction is occurring at par. This signifies that the buyer is paying the full, unadjusted principal value of the pooled loans.
Simple Definition
Par is an abbreviation for "Par value," which refers to the nominal or face value of a security, such as a stock or bond. For stocks, it represents a minimum legal value assigned by the company, while for bonds, it is the principal amount repaid to the holder at maturity. This value often differs from the security's market price.