Par value is a term commonly used in finance and accounting to refer to the face value of a bond or stock. It represents the nominal value of the security as determined by the issuer. Calculating par value requires a simple formula that takes into account the total amount of money raised by issuing the security and the number of shares or bonds issued. Let’s take a look at the steps involved in computing par value.
How to Compute Par Value?
The formula to compute par value is: Par Value = Total Amount of Money Raised / Total Number of Shares or Bonds Issued
For example, if a company raises $1,000,000 by issuing 100,000 shares, the par value would be $10 per share ($1,000,000 / 100,000 = $10).
FAQs on Computing Par Value:
1. What is par value?
Par value is the face value of a bond or stock, representing the nominal value of the security as determined by the issuer.
2. Why is par value important?
Par value helps determine the minimum price at which a security can be issued and gives investors an idea of the financial health of the company.
3. Is par value the same as market value?
No, par value is not the same as market value. Par value is the nominal value of the security, while market value is the price at which the security is currently trading in the market.
4. Can par value change over time?
No, par value remains constant throughout the life of the security. It does not change even if the market value of the security fluctuates.
5. What happens if a security is issued below par value?
If a security is issued below par value, it is said to be issued at a discount. This can happen if the market value of the security is lower than the par value.
6. What happens if a security is issued above par value?
If a security is issued above par value, it is said to be issued at a premium. This can happen if the market value of the security is higher than the par value.
7. How does par value affect dividends?
Par value has no direct impact on dividends. Dividends are typically paid based on the company’s profitability and are not tied to the par value of the stock.
8. Can a company issue securities without par value?
Yes, a company can issue securities without par value, known as no par value stock. In such cases, the security is issued without a specified face value.
9. How is par value different from stated value?
Par value is a legal term used to represent the face value of a security, while stated value is a term used in accounting to represent a value assigned to a security for accounting purposes.
10. How is par value used in accounting?
Par value is used in accounting to determine the initial value of a security issued by a company and to calculate the company’s capital structure.
11. Is par value the same as book value?
No, par value is not the same as book value. Par value is the nominal value of a security, while book value is the value of an asset or security as recorded on the company’s balance sheet.
12. Can par value be negative?
No, par value cannot be negative. It represents the minimum value of a security as determined by the issuer.
Computing par value is a straightforward process that involves dividing the total amount of money raised by the company by the total number of shares or bonds issued. Understanding par value is essential for investors and financial analysts to assess the value of a security and make informed investment decisions.