Investors who buy bonds obtain a key piece of information that the purchasers of most other investments don’t get—they know precisely how much money the bonds will be worth when they mature. This amount is known as the par value of a bond or the face value of a bond, and unlike the bond’s “market value,” it does not fluctuate over time.
Example: If you purchase a 10-year Treasury note with a par value of $10,000 at auction, that note will be worth $10,000 at the end of those 10 years…guaranteed. During that intervening decade, you’ll receive interest payments every six months and your Treasury note’s market value might rise or fall depending on interest rate fluctuations—and, to a lesser extent, depending on the US government’s credit quality—but you can be very confident that at the end of 10 years you’ll receive $10,000.
Investors have no such guarantee of future value when they buy most other investments, such as stocks or real estate. In fact, they don’t have this guarantee when they invest in bonds through bond mutual funds (as opposed to buying bonds directly)—mutual funds don’t have maturity dates or par values.
You’re only guaranteed to receive a bond’s par value if you hold that bond until it reaches its maturity date. If you sell the bond before the maturity date, the amount you receive will be determined by its current market value.
You might not receive par value for a bond at maturity if the entity that issued that bond defaults on its bond payments. But this is mainly a concern with sub-investment-grade bonds. Investment-grade bonds are considered the highest-rated bonds and least risky. The trade-off is that bonds that are not investment-grade (such as high-yield or junk bonds) offer a greater yield if the issuer does not default.
Defaults are tremendously unlikely with US government bonds and very rare with investment-grade corporate bonds.
That does not mean there is zero risk. And while you may know exactly how much money you’re going to receive on a future date, if inflation rates skyrocket, that dollar figure might be worth less than you had anticipated.
Technically, stocks do have a “par value,” but unlike with bonds, the par value of a share of stock has virtually no importance to investors. It is simply a figure assigned to the shares by the company for arcane accounting and legal purposes. In fact, the par value of a share of stock often is just one cent.
The par value of a share of preferred stock often is set at $25—preferred stock is a hybrid security that shares characteristics of both stocks and bonds. This par value will be used in the calculations that determine preferred stock dividends and in certain other circumstances—but unlike bond buyers, purchasers of preferred stock are not guaranteed to receive the par value of these shares at some future maturity date.
