Par Value

The par value of a share of common stock is best described as:

1. A.The minimum price at which the shares may legally tradeTreats par as a price floor. Nothing prevents common stock from trading far below its stated par value.
2. B.The price at which the shares were sold in the company's initial public offeringTempting because both are one-time figures fixed at the start, but the offering price reflects market demand while par is usually pennies and unrelated to it.
3. C.The amount the corporation must repay each shareholder if it dissolvesImports the bond idea of redemption at par. Common stock has no maturity and the issuer never promises to return anything.
4. D.An arbitrary value assigned in the corporate charter for accounting purposes, with no relationship to market priceCorrect. On common stock par is a bookkeeping convention, often set at a token amount such as 0.01 dollars, used to record the equity accounts.

Why: Par value on common stock is an arbitrary bookkeeping figure fixed in the corporate charter. It is used for accounting entries in the equity section and has no bearing on what the share is worth in the market.

A preferred stock is described as "6 percent preferred, 100 dollars par." That description tells an investor that:

1. A.The annual dividend is 6 dollars per share, normally paid in quarterly installments of 1.50 dollarsCorrect. The stated rate is applied to the 100 dollar par value to produce the annual dividend.
2. B.The shares will be redeemed by the issuer at 106 dollars per shareInvents a call price out of the dividend rate. A call price is a separate term and many preferred issues are not callable at all.
3. C.The holder is assured a 6 percent total return each yearConfuses the stated dividend rate with total return, which also depends on what happens to the share price.
4. D.The dividend equals 6 percent of the preferred stock's current market priceThat calculation gives current yield, not the stated dividend. The declared payment is anchored to par and never changes as the price moves.

Why: On preferred stock par value is functional: the stated rate is applied to par. Six percent of 100 dollars par equals a 6 dollar annual dividend per share, normally paid quarterly.

In bond terminology, "par value" refers to the amount that is...

1. A.The price the underwriter paid the issuer for the bonds at the offeringThat is the underwriting proceeds figure, which reflects the spread the syndicate keeps. It has nothing to do with the redemption amount.
2. B.Repaid to the holder at maturity, and on which the coupon rate is calculatedCorrect. Par is the principal the issuer must return at maturity and the base figure used to compute the coupon payment.
3. C.The current price at which the bond trades in the secondary marketThis confuses par with market price. Market price moves daily with interest rates and credit; par never changes.
4. D.The total interest the bond will pay over its entire lifeThis confuses principal with cumulative coupon income. Total interest depends on the coupon rate and the number of years; par is a single lump-sum repayment.

Why: Par value (also called face value or principal) is the fixed amount the issuer contractually repays the holder at maturity. It is also the base on which the coupon rate is applied. Most corporate and municipal bonds carry a 1,000 dollar par.

A corporate bond with a 1,000 dollar par value is quoted at 98. In dollars, that quote equals...

1. A.1,098 dollarsThis treats the quote as an amount added to par. A quote of 98 is below par, so the bond trades at a discount.
2. B.9,800 dollarsThis multiplies by 100 instead of 10. One point on a 1,000 dollar bond is 10 dollars, not 100 dollars.
3. C.98 dollarsThis reads the quote as a dollar amount. Bond quotes are percentages of par, not prices in dollars.
4. D.980 dollarsCorrect. 98 points equals 98 percent of the 1,000 dollar par, which is 980 dollars.

Why: Corporate and municipal bonds are quoted in points, and one point equals 1 percent of par. A quote of 98 means 98 percent of 1,000 dollars, or 980 dollars.