Parity

The most common definition of parity is equality in price or value. Workers often ask for pay parity when they are transferred to another part of the country. Software companies offer parity with competing products. Parity can also refer to parity price of bonds, or stocks, purchasing power parity, and parity payments.
The parity price of a bond equals the number of shares of stock (in exchange) times the current price of the stock share. Convertible bonds are those that can be exchanged for a specific number of shares of stock in the company, usually any time until the bond reaches maturity. For example, if XYZ Corporation issues a convertible bond exchangeable for 20 shares of the company’s stock, and the current price of the stock is $45, the parity price of the bond is $45 × 20 = $900. Companies offer convertible bonds as a way to attract investors and pay a lower interest rate to borrow funds.
The parity price of a stock is the bond’s market value divided by the conversion ratio. In the example above, if XYZ’s bond is selling for $1,000, the parity price for the stock is $1,000 ÷ 20 = $50.
Purchasing power parity is the exchange rate between the currencies of two countries that equalizes the purchasing power of both currencies. The idea behind purchasing power parity is called the “law of one price.” When there are no transactions costs, the prices of products in competitive markets tend to be equal. When purchasing power in one country is greater than purchasing power in another country, that country’s currency is considered overvalued, while the other country’s currency is considered undervalued. Consumers with overvalued currencies increase their purchases of imports, which in turn tend to decrease the value of the currency, if it is allowed to fluctuate. The peso crisis in Mexico during the mid-1990s was largely due to a disparity in the peso’s purchasing power, leading to increasing trade deficits.
The term parity payments refers to a system of support for agricultural producers. Under parity-payment programs, the United States Department of Agriculture uses price supports and production quotas to increase farmers’ income, allowing farmers to maintain parity with nonfarmworkers. Parity payments were instituted in the Agricultural Adjustment Act of 1938, authorizing the secretary of agriculture to make payments to producers of corn, wheat, cotton, rice, and tobacco. Over time, parity-payment programs have been modified or eliminated.
See also exchange rates; interest rates.
Further reading
“Purchasing Power Parity,” Pacific Exchange Rate Service. Available on-line. URL: http://pacific.commerce.ubc.ca/xr/PPP.html.