Par Value
Par value — also called face value or principal — is the nominal value of a bond as stated on the certificate, representing the amount the issuer promises to repay the bondholder at maturity.
For bonds, par value is typically set at $1,000 per bond in the U.S. market, though certain Treasury bills and institutional bonds use larger denominations. This is the amount the issuer is contractually obligated to return to the bondholder at the maturity date, regardless of what price the bond traded at in the secondary market during its lifetime. The coupon rate is always applied to par value, not to the market price, which is why understanding par value is foundational to bond math.
Bonds trade at par, at a premium, or at a discount depending on market conditions. When a bond's market price equals its par value, it trades 'at par.' When market interest rates fall below a bond's coupon rate, the bond becomes more valuable and trades 'at a premium' — above par. Conversely, when rates rise above the coupon rate, the bond trades 'at a discount' — below par. Newly issued bonds are typically priced at or close to par so the coupon rate approximately equals the prevailing market yield.
The difference between a bond's purchase price and its par value has important accounting and tax implications. For bonds purchased at a discount, the difference (the 'original issue discount,' or OID) must be amortized and included as ordinary income over the bond's life for U.S. tax purposes, even though no cash is received until maturity. This 'phantom income' treatment is one reason why zero-coupon bonds — which are always issued at a deep discount to par — are particularly popular in tax-deferred retirement accounts.
For equities, par value has an almost entirely different and largely historical meaning — it is a nominal accounting figure (often $0.01 or $0.001 per share) used in the balance sheet and corporate charter, with no meaningful relationship to market price. In bond markets, par value is substantive and operationally significant. Treasury bills, notes, and bonds are all quoted as a percentage of par value — a quote of '98-16' for a Treasury note means the bond is priced at 98 and 16/32nds of par, or $985.00 per $1,000 face value.
Understanding par value also matters for evaluating total return. An investor who buys a bond at $950 (below par) and holds it to maturity at $1,000 earns both coupon income and a $50 capital gain. That capital gain is the difference between par and purchase price, and it is reflected in the yield-to-maturity calculation. Par value thus anchors every major bond calculation, from current yield to yield to maturity to the bond's dollar price.