Legal Definitions - Par value

Par value, also known as nominal value, refers to a stated or face value assigned to a financial instrument, most commonly bonds and stocks. For bonds, it represents the principal amount that the issuer promises to repay to the bondholder at maturity, and it is also the basis upon which interest payments are calculated. For stocks, it is a nominal value assigned to each share in the company's corporate charter, primarily serving as an accounting and legal formality rather than reflecting the market price of the stock.

• Example 1: Municipal Bond Issuance

  Imagine a municipal government issues bonds to fund the construction of a new public park. Each bond is assigned a par value of $5,000.

  This $5,000 is the exact amount the municipal government promises to repay each bondholder when the bond matures. Furthermore, if the bond has an annual interest rate of 3%, the annual interest payment to the bondholder would be calculated based on this $5,000 par value, resulting in $150 per year (3% of $5,000). The par value here directly determines both the final repayment amount and the regular interest income for the bondholder.

• Example 2: Common Stock of a Startup Company

  A newly established technology startup incorporates and issues 50 million shares of common stock, with its corporate charter specifying a par value of $0.0001 per share.

  This extremely low $0.0001 par value is a legal and accounting designation. It does not reflect the price at which the stock might be bought or sold in the market, which could be several dollars per share. Instead, it serves as a foundational accounting entry, representing the minimum legal capital for each share, distinct from the actual investment value or market trading price.