A par issue is an issue of securities at their nominal value, the nominal value being the price paid for the security ( bill of exchange , share , obligation , public debt title , etc. ) when the issuer initially sold it .
We can also define it as the amount to be delivered for the acquisition of a particular security, that when the price paid is equal to the nominal value, we will say that the security is quoted at par. The issuance may therefore be on par , if the amount to be paid is greater than the nominal value of the security, on par, if both amounts coincide and under par , if an amount less than the nominal value must be delivered.
The issuance of financial securities is one of the ways that companies have to get financing in the financial markets. These securities may be shares ( equities ) and bonds or bonds ( fixed income ).
Equity issuance in equities
In a capital increase , it is considered that a par issue is a released issue, charged to the reserves that the company owns and, therefore, does not require any disbursement for the shareholder, but it can also be issued as a percentage when it is paid by the investor and the other by the company, since it passes a portion 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 obtain financing to cover its expenses, investments and projects that the company has to develop its activity.
When a company carries out an extension under par, the disbursement is less than the nominal value of the share and, therefore, shareholders may be interested in acquiring those new shares that will be put into circulation.
Example on a par
A company has 1,000,000 shares with a nominal 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 theoretical 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 expand its capital by 2,000,000 euros and does so on a par , thus issuing 200,000 new shares (2,000,000 / 10). The new theoretical value of an action 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 said dilution effect would occur.
To avoid this effect, it would be necessary to demand from the new shareholders an issue premium :
PE = (10,000,000 + 5,000,000 + 2,000,000 + issue premium) / 1,200,000 = 15 euros.
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 action would be:
VT ** = 18,000,000 / 1,200,000 = 15 euros
That is, the same 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 at its expiration date. We can see in the image how the different bondsissued, a zero coupon (issued at discount or issued by the nominal and reimbursement with premium), 7% coupon, 10% coupon and 13% coupon at maturity its amortization value is 100% of its nominal value, denominating “at par”.
Zero coupon bonds (no intermediate payments) issued at the 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. On the other hand, they can also be issued at their nominal value and on expiration receive a reimbursement 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 title, being able to be annual, semiannual, quarterly, monthly, etc.
It is common in fixed income, to express its price as a percentage of the par value or the nominal bond / obligation. In a par issue , the price will be 100%, in a par issue its price will be expressed above 100% (for example 102%), and in a par issue , also known as the discount its price will be below 100% (for example 98%).
If we have a security whose nominal value is 100%, and that is quoted in the secondary or trading market at 75%, we would say that it is quoting 75% of the par value. When this percentage is equal to 100, we say that the price is on par, and if it were quoted at 105, the price would be on par.
Finally, we must point out that the theory tells us that fixed-income securities can never be issued over par , given that it would not make sense that the investor could demand 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, as issued at a discount or with a premium.