What Does At Par Mean? Bonds and Stocks Trading at Face Value

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At par means a security is priced at exactly its face value, also called par value. A bond with a $1,000 face value that sells for $1,000 is trading at par. The term applies mainly to bonds, preferred stock and other debt instruments, which can also trade below par (at a discount) or above par (at a premium).

What Par Value Means

Par value is the amount the issuer promises to repay at maturity and the base on which interest is calculated. When securities were printed on paper, this amount appeared on the face of the certificate, which is where “face value” comes from. Common par amounts for bonds are $1,000 and $100.

The par value does not change over the bond’s life, but its market price does. If the issuer does not default, the bondholder receives par at maturity no matter where the price traded in the meantime. This is why a bond’s price tends to move toward par as maturity approaches, a pattern known as “pull to par.”

How Bond Prices Are Quoted Relative to Par

Bond prices are usually quoted as a percentage of par:

• 100 means the bond trades at 100% of face value, which is at par.
• 99 means 99% of face value. On a $1,000 bond, that is $990, below par.
• 102 means 102% of face value, or $1,020, above par.

Why Bonds Trade at, Below or Above Par

A bond’s coupon rate is fixed. Market yields on comparable bonds are not. The price adjusts so that a buyer earns roughly the market yield, regardless of the coupon:

Credit quality works the same way. If the issuer’s credit rating is cut, investors demand a higher yield, so the price falls. Time to maturity also matters: the further away maturity is, the more the price reacts to a change in rates.

Issuance at par, discount or premium

The same logic applies at issuance. A bond is issued at par when buyers pay the full face value, at a discount when they pay less and at a premium when they pay more. Issuers often set the coupon close to the yield investors demand for that issuer’s risk and maturity, so the bond sells at par. If market rates move before the sale, or the coupon is deliberately set above or below market yields, it is issued at a premium or a discount.

Worked Example

Hypothetical example for illustration only. A bond has a $1,000 par value, a 5% annual coupon (paying $50 a year) and several years to maturity.

Market yield is 5%. The bond sells for $1,000. The current yield is $50 ÷ $1,000 = 5%, equal to the coupon. The bond is at par.

Market yield rises to 6%. No buyer will pay $1,000 to earn 5% when similar bonds pay 6%, so the price falls below par. Suppose it trades at $950. The current yield becomes $50 ÷ $950 = 5.26%, and the buyer also gains $50 when the bond repays $1,000 at maturity. Together, the coupon and that gain bring the total return up toward the 6% market rate.

Market yield falls to 4%. The 5% coupon is now attractive, so buyers bid the price above par. At $1,050, the current yield is $50 ÷ $1,050 = 4.76%, and the holder loses $50 at maturity when only par is repaid.

Current yield (annual coupon ÷ price) ignores that gain or loss at maturity. Yield to maturity includes it and is the standard measure for comparing bonds priced away from par.

Par for Preferred and Common Stock

Preferred stock works much like a bond. Its dividend is usually stated as a percentage of par. For example, a hypothetical preferred share with a $25 par and a 6% dividend rate pays $1.50 a year. Its market price rises or falls relative to par as market yields change. Par is also typically the amount paid if the shares are redeemed.

Common stock par value is mostly a legal formality. Because a company commits in its charter not to issue shares below par, it sets par very low, often a cent or a fraction of a cent, and some states allow no-par shares. Shares are usually sold well above par: the par amount goes to the common stock account on the balance sheet and the excess goes to additional paid-in capital. Par value has no effect on the stock’s market price.

Related Uses of “Par”

• Redemption at par: the issuer repays face value, at maturity or when a bond is called early on terms that pay par rather than a call premium.
• Callable at par: the issuer can buy the bond back at face value. Issuers tend to call bonds when rates fall, which caps how far above par the price is likely to rise.
• Options: a contract whose strike price equals the underlying’s price is “at the money,” not “at par.”
• “On par with”: in everyday speech this means equal or comparable. “At par” in finance refers specifically to price versus face value.

Limitations

Trading at par tells you only that price equals face value. Two bonds at par can carry very different credit risk, maturity and interest-rate sensitivity, and the next move in rates or credit ratings pushes either one to a discount or premium. Neither par nor a discount is automatically better: a discount bond earns part of its return as a gain at maturity, and a deep discount can reflect real doubts about whether the issuer will repay par at all. Compare yield to maturity and credit quality instead.

The Bottom Line

Bond and preferred stock investors use par to see whether a security trades at a discount or a premium and what it repays at maturity. A price at par says nothing about credit risk, maturity or rate sensitivity, and neither par nor a discount is automatically better. Compare yield to maturity and credit quality when weighing bonds priced at, below or above face value.