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Finance: What is Par Value? 113 Views
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Description:
What is par value? The notional value of a stock or bond before an offering takes place. When a company is started, founders come up with a par value for their shares, usually fractions of a penny. With bonds, par value is normally $1,000, comprising one unit of a bond offering.
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Transcript
- 00:04
Finance a la shmoop what is par value okay mercifully we'll dispense [Man taking a swing with a golf club]
- 00:11
with the golf jokes but with one exception par in golf and it relates
- 00:15
here is the right number i.e the one you're shooting for the one you're
- 00:19
supposed to hit that is a par for golf hole is designed so that you hit your [A golf ball landing on the fairway]
- 00:24
drive then you hit your approach shot which is meant to land on the green and
Full Transcript
- 00:27
then your quote supposed to unquote to putt for a total of four strokes at par [Man struggling to put the ball in the golfer hall]
- 00:32
4 right and it may or may not include saying close enough and picking up your
- 00:36
ball five feet away from the hole while calling it a gimme so yeah that's par
- 00:40
four strokes on a par 4 well in finance par value generally relates to the [Definition of par value relating to pricing of bonds written on chalkboard]
- 00:45
pricing of bonds and you'll see where we're going here with the right number
- 00:49
in quotes for a bond a corporation needs to borrow money to say build a new nose [Elephant using a noseclipper and chasing a man]
- 00:54
clipper factory well that new factory will allow the corporations
- 00:59
export Clippers to China and allow its products to be more high-tech yeah these
- 01:03
things are now the equivalent of a Brazilian wax for your nostrils anyway [Man giving a Brazilian wax to another mans nostrils]
- 01:07
the company along with its bankers believes that it should have to pay
- 01:10
about six percent interest on the loans it's taking out so it markets its bonds
- 01:14
as six percenters and in the process a more positive story is told to Wall [Men discussing the nose clipper industry bonds on Wall Street]
- 01:18
Street about the future of nose clipping technology as pioneered by shnozholes
- 01:24
Inc the perceived risk in the bond so sound and there's a lot of demand by [People looking up at Shnozholes, Inc building]
- 01:28
them the standard unit in which a bond is generally sold is a thousand dollars
- 01:33
that's a thousand dollars for each unit of a bond got it so on one unit of a
- 01:38
typical bond that thousand dollars interest is paid twice a year ie in this
- 01:43
case the company would be paying thirty bucks twice a year to rent each unit of [Company paying a bank $30 twice]
- 01:48
it's thousand dollar loan so the company issues the bonds and all of a sudden
- 01:52
they trade up on strong demand from Wall Street to eleven hundred dollars per
- 01:56
unit well a new buyer of the bond would be getting less than six percent [A new person buying bonds from the company]
- 02:01
interest when they bought that bond for 1,100 bucks because even though they
- 02:04
still get 30 bucks twice a year in bond rent money instead of paying a grand for
- 02:09
that 60 bucks a year they had to pay 1100 dollars for it in fact at 11 hundred [Buyers trading $1000 for $1,000]
- 02:13
dollars and still getting 60 bucks a year the interest rate has fallen to
- 02:18
about 5.45 percent ie less than six the quote right unquote value of that bond
- 02:24
or its par values yeah we went there, was a thousand bucks that's where it was
- 02:29
priced when it was offered and it's that thousand dollars from which the interest [Bank with a thumbs up beside the par value price]
- 02:33
payments are pegged how do we know what par value is well you can guess.. little
- 02:39
birdie told us [golfball striking a little bird perched on a tree]
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