Choose one of the following topics and present your analysis, which may include
ID: 2774305 • Letter: C
Question
Choose one of the following topics and present your analysis, which may include your personal opinions:
Suppose you decide to invest in corporate bonds. Accordingly, you visit a bond store. You see 3 bonds on the shelf. One is priced at $1,015.53, another is priced to sell at $1,300.00, and a third is selling at a discounted amount of $876.06. All have a $1,000.00 face value, and carry equal risk. From your reading, and from class lecture, you know that you will be earning the same rate on your investment, regardless of which bond(s) you purchase. But you have a friend with you, who doesn't understand how you can possibly earn the same interest rate, due to the difference in purchase price. How will you explain this concept to him or her?
Using the Internet, the City U library, or any other source, research the meaning and history of "par value" as it pertains to common stock. Is this term still relevant to stockholders' equity today, or is it merely an anachronism, an unnecessary carryover from the past, much like an old TV antenna we're too lazy to remove from the roof of our house?
Explanation / Answer
The coupon payments on each bonds are different thats why the price is different. For instance, in case of bonds with price < than par value coupon rate is less than YTM and vice versa. However as time passes the price of bond tends to par value and thus capital gains/losses on the bonds that are not priced value. Thus over return with coupon and capital gains/losses will be same.
“Par value” is also referred to as face value, par or nominal value of common stock. Par value refers to the value written on the face of the common stock certificate or in the corporation’s organization or operating documents. In the formation of a corporation and registration with the secretary of state, many states mandate that the founders issue stock with a specified par value.
Legal Liability of Par Value
The par value mandate creates a subsequent legal liability that the shareholders of this stock contribute, at a minimum, this face value of the stock in order to fund the company. If the shareholders don't do so and the corporation requires the funds, these shareholders would be liable for the difference between the actual issue price and the face value, if the issue price is less than the face value, essentially “under par.”
No Par Value
To avoid this potential liability, most large companies issue stock at no par value or at a par value of $0.01 or less. However, a number of smaller corporations who intend to have a limited number of shareholders issue stock at $1.00 par value. In either scenario, par value becomes little more than an accounting item that is tracked in the shareholder’s section of the balance sheet. The actual value, or the amount that the shareholders actually pay for the stock, is tracked separately in the same section as the “paid-in capital in excess of par.”
Par Value Importance
Par value is an important term for any small business owner or aspiring entrepreneur to understand prior to forming a corporation, issuing stock or pursuing investors. Although it is primarily a legal and accounting term, improper understanding could lead to difficult consequences. For example, a business issuing 1,000 shares stock at a par value of $10.00 creates an immediate on paper capitalization, or book value, of $10,000