An issue at par is an issue of securities at their nominal value, the nominal value being the price paid for the security ( bill of exchange , action , obligation , public debt security , etc. ) when initially sold by the issuer .
We can also define it as the amount that must be delivered for the acquisition of a certain title, that when the price paid is equal to the nominal value, we will say that the title is priced at par. Therefore, the issuance can be above par, if the amount to be paid is higher than the nominal value of the security, at par, if both amounts coincide and below par, if it is necessary to deliver an amount lower than the nominal value.
The issuance of financial securities is one of the ways that companies have to obtain financing in the financial markets. These securities can be stocks (equities) and obligations or bonds (fixed income).
Equity issue at par
In a capital increase, a par issue is considered to be a released issue, charged to the reserves that the company has and, therefore, does not require any disbursement for the shareholder, but it can also be a released issue in a percentage when it is paid by the investor and the other by the company, since it passes a part of voluntary reserves to capital. The share price will be set by the company after approval by the Shareholders’ Meeting.
The issuance of securities are part of the capital increases of a company in order to raise financing to cover its expenses, investments and projects that the company has to carry out its activity.
When a company makes an increase under par, the outlay is less than the par value of the share and, therefore, shareholders may be interested in acquiring those new shares that are going to be put into circulation.
Example of at par
A company has 1,000,000 shares with a par value of 10 euros. In addition, it has reserves amounting to 5,000,000 euros. The capital of the company is: 1,000,000 x 10 = 10,000,000 euros.
The notional value of a share will be equal to the amount of capital plus reserves, divided by the number of shares:
VT = (10,000,000 + 5,000,000) / 1,000,000 = 15,000,000 / 1,000,000 = 15 euros.
On the other hand, the company decides to increase its capital by 2,000,000 euros and does so at par , thus issuing 200,000 new shares (2,000,000 / 10). The new notional value of a share would be the following:
VT * = (10,000,000 + 5,000,000 + 2,000,000) / (1,000,000 + 200,000) = 17,000,000 / 1,200,000 = 14.17 euros.
Therefore, the aforementioned dilution effect would occur.
To avoid this effect, it would be necessary to demand an issue premium from the new shareholders:
PE = (10,000,000 + 5,000,000 + 2,000,000 + issue premium) /1,200,000 = 15 euros.
From the foregoing, it follows that the total issue premium should be 1,000,000 euros, which implies 5 euros for each of the new shares issued.
The new theoretical value of the share would be:
VT ** = 18,000,000 / 1,200,000 = 15 euros
In other words, the same one that existed before the capital increase.
Issuance at par in fixed income
Bonds and obligations at par are those whose nominal value is that which is returned to the holder of the title on its expiration date. We can see in the image how the different bonds issued, a zero coupon (issued at a discount or issued by the nominal and repayment with premium), coupon at 7%, coupon at 10% and coupon at 13% at maturity, its amortization value is 100% of its nominal value, being called "at par".
The zero coupon bonds (there are no interim payments) issued at a discount will be issued, for example, at 85% of their nominal value and at maturity the investor will receive 100%, obtaining the difference in profitability. For their part, they can also be issued at their nominal value and at maturity receive a redemption premium, that is, issued at 100% and amortization at 102%.
The coupon of a bond or obligation is a payment to its holder of a certain percentage of the nominal value of the security, which can be annual, semi-annual, quarterly, monthly, etc.
It is common in fixed income, to express its price as a percentage of the par value or the nominal value of the bond / obligation. In an issue at par , the price will be 100%, in an issue above par its price will be expressed above 100% (for example 102%), and in an issue below par , also known as a discount. its price will be below 100% (for example 98%).
Example of a par quote
If we have a security whose nominal value is 100%, and which is listed on the secondary or trading market:
- It is trading below par if it is trading at 75%, specifically we would say that it is trading 75% of the value at par.
- Quote at par, when this percentage is equal to 100, that is, the market price and the nominal value are the same.
- It is trading above par, if it is trading at 105.
Finally, we must emphasize that the theory tells us that fixed income securities can never be issued above par , since it would not make sense that the investor could be demanded more than the nominal value for the purchase of a bond or obligation. However, in the case of the vast majority of fixed income securities, the issue price coincides with the nominal value and the securities are issued at par, although in some cases the price may be lower or higher, depending on how they are issued. at a discount or with a premium.