Par Value for Dummies
noun
What does Par Value really mean?
Par value refers to the face value or nominal value of a financial instrument, such as a bond or a stock. It represents the amount of money the issuer of the instrument promises to repay to the investor at maturity or upon redemption. In simpler terms, it's like the full amount that you would get back if you were lending someone money and they promised to pay you back with interest at a certain date in the future.
To help you understand better, let's imagine you have a really kind friend named Alex who needs to borrow some money from you. Alex wants to start a lemonade stand and needs some funds to buy the ingredients and equipment. Now, Alex knows you have some spare money, so they come to you and ask if you could lend them $100. Being a good friend, you agree to help them out, but of course, you want your money back in the future. So, you and Alex agree that they will give you back the $100 plus an extra $20 as interest after 6 months.
Here, the $100 is like the par value. It's the original amount you agreed to lend to Alex. And in 6 months, when Alex pays you back the $120, that's like the maturity value. It's the par value plus the interest. So, you can see that the par value is really just the starting point or the original amount involved in a financial transaction.
Now, par value can also come into play when talking about stocks. Let's say you decide to invest in a company, and you buy a share of their stock for $50. The par value, in this case, is the original price assigned to that particular stock by the company. The market value of the stock might change over time, meaning its price may go up or down, but the par value remains the same.
So, basically, par value is just the initial amount or the face value of a financial instrument, like a bond or stock, that represents the amount the issuer promises to repay to the investor in the future. And just like with the example of lending money to your friend, it's the starting point or the base value around which other factors, such as interest or market value, revolve.
To help you understand better, let's imagine you have a really kind friend named Alex who needs to borrow some money from you. Alex wants to start a lemonade stand and needs some funds to buy the ingredients and equipment. Now, Alex knows you have some spare money, so they come to you and ask if you could lend them $100. Being a good friend, you agree to help them out, but of course, you want your money back in the future. So, you and Alex agree that they will give you back the $100 plus an extra $20 as interest after 6 months.
Here, the $100 is like the par value. It's the original amount you agreed to lend to Alex. And in 6 months, when Alex pays you back the $120, that's like the maturity value. It's the par value plus the interest. So, you can see that the par value is really just the starting point or the original amount involved in a financial transaction.
Now, par value can also come into play when talking about stocks. Let's say you decide to invest in a company, and you buy a share of their stock for $50. The par value, in this case, is the original price assigned to that particular stock by the company. The market value of the stock might change over time, meaning its price may go up or down, but the par value remains the same.
So, basically, par value is just the initial amount or the face value of a financial instrument, like a bond or stock, that represents the amount the issuer promises to repay to the investor in the future. And just like with the example of lending money to your friend, it's the starting point or the base value around which other factors, such as interest or market value, revolve.
Revised and Fact checked by Olivia Brown on 2023-10-29 18:40:33
Par Value In a sentece
Learn how to use Par Value inside a sentece
- When you buy a share of stock, it may have a par value of $10, which means the company values each share at $10.
- If you borrow money from a bank and give them a bond with a par value of $1,000, it means you promise to pay back that amount.
- Imagine you have a savings bond with a par value of $500. That means it will be worth $500 when it matures, regardless of how much you paid for it.
- If you have a coupon bond with a par value of $100 and an annual coupon rate of 5%, you will receive $5 every year as interest.
- When a company issues new shares of stock at a par value of $50, it means they are selling each share for $50 to investors.
Par Value Synonyms
Words that can be interchanged for the original word in the same context.
Par Value Hypernyms
Words that are more generic than the original word.