Meaning and definition of Par Value
The par value can be defined as the face value or stated value of a bond. If put another way, it is generally a dollar amount that is assigned to a security while representing the value contributed for each share in cash or goods. As expressed by Investopedia, the par values for diverse fixed-income products will be different. Generally, bonds have a par value of $1,000, whereas most money market instruments feature higher par values. Also, stocks generally have a par value of $0.01 or none at all.
Calculating the Par Value of a Bond
The key steps involved in computation of the par value of a bond include:
1. Evaluate a bond before buying it. Its par value, coupon rate, and maturity date are the three key instruments required to compare one bond to another.
2. Recognize that the face value of a bond is the redemption value, the amount of money received when the bond is redeemed. Bonds are generally designed to reach par value at maturity.
3. Identify the coupon rate of the bond, i.e. the amount of interest which is stated on a bond. It is determined upon issuance of the bond and is expressed as a percentage. If, in case, interest rates exceed the coupon rate, the bond is sold at a value lesser than the par value or “at a discount.” If, in any case, the interest rates are below the coupon rate, the price of the bond exceeds the par value or “is at premium.”
4. Mitigate the risk or increase the profit by evaluating the maturity date of the bond. A bond featuring a short maturity date is comparatively less risky than the one with a longer maturity date. This is because of the reason that it is more predictable and there is less time for interest rates and fluctuating prices. However, as a general rule, bonds with longer maturity dates shell out higher interest.
5. Compute the potential earnings with the help of an online calculator. One of the examples is a yield to maturity calculator, whereas another calculates the current value of savings bonds.
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