Par Value vs. Face Value: What’s the Difference?



Par Value vs. Face Value: An Overview

When referring to the value of financial instruments, there’s effectively no difference between par value and face value. Both terms refer to the stated value of the financial instrument at the time it is issued.

Par value is more commonly used with bonds than with stocks. With bonds, the par value is the amount of money that bond issuers agree to repay to the purchaser at the bond’s maturity. A bond is basically a written promise that the amount loaned to the issuer will be paid back.

In terms of stocks, par value is often set to comply with many state’s regulations that require that stock not be sold below par value. Because of this, most companies set a par value for their stocks at a minimal amount, such as Apple Inc., which has a par value of $0.00001 per share. Not all states require a par value; as such, not all companies will set one.

Key Takeaways

  • The entity that issues a financial instrument like a bond or stock assigns a par value to it.
  • Par value refers to the “face value” of a security, and the terms are interchangeable.
  • Par value and face value are most important with bonds, as they represent how much a bond will be worth at the time of the bond’s maturity.
  • With stocks, par value is a mostly arbitrary number, often issued to avoid any potential legal issues if the stock drops below its par value.

Par Value

Bonds are generally issued with par values of either $1,000 or $100. If an investor purchases a bond with a $1,000 par value and a maturity date set five years down the road, then the issuing entity is required to pay the investor, or bondholder, $1,000 after the five years have passed.

The face value of a share of stock is the value per share as stated in the issuing company’s charter. This is the minimum value that each shareholder is expected to pay per share of stock in order to fund the business. This value is usually quite low—nearly $0 per share—to protect shareholders from liability in the event the business is not able to meet its financial obligations.

Face Value

Face value is typically an arbitrary number set by the issuer, which is usually indicated on the company’s balance sheets.

For example, if the issuer needs to have a factory-built that has a cost of $2 million, it may price shares at $1,000 and issue 2,000 of them to raise the needed funds. The value of the stocks increases as the issuer begins to turn quarterly profits and sees returns on the investments generated by investors purchasing the stocks.

The face value, while arbitrary in appearance, is determined by the company so that they can get real numbers for growth and projected needs.

Special Considerations

While the face value or par value of these securities is important, it has little bearing on the price an investor must pay to purchase a bond or a share of stock, called the market value.

The market value of stocks and bonds is determined by the buying and selling of securities on the open market. The selling price of these securities, therefore, is dictated more by the psychology and competing opinions of investors than it is by the stated value of the security at issuance. As such, the market value of a security, particularly a stock, is of far greater relevance than the par value or face value.

Is Par Value the Same Thing as Face Value?

Yes. Both terms refer to the stated value of a security issued by a corporation.

What Is the Difference Between Face Value and Market Value?

The par value (face value) of a security will never change. For instance, a bond issued at par of $1,000 will always pay that amount upon its maturity. However, because bonds pay interest, the market price of the bond may rise or fall from the face value as prevailing interest rates change. For instance, if the bond pays fixed interest at 5% and prevailing market rates fall to just 2%, people will pay more for that bond than its face in order to enjoy the higher yield. This is why a bond’s market price is inversely related to interest rates.

What Is No-Par Value Stock?

Some companies issue their shares with some nominal par value such as $0.01 per share or less, which is not indicative of the market price of those shares. Certain states mandate such a minimum par value be set. Companies in other states may issue no-par value stock, which has no such stated value.



Source link

Leave a Reply