Par Value vs. Market Value: An Overview
Par value is also called face value, and that is its literal meaning. The entity that issues a financial instrument like a bond or stock assigns a par value to it. When shares of stocks and bonds were printed on paper, this par value was printed on the shares, and it indicated the amount of money a share was worth.
Market value, however, is the actual price that a financial instrument is worth at any given time, and it fluctuates constantly with the ups and downs of the stock markets.
To the average investor, the par value of a bond is quite relevant, while the par value of a stock is something of an anachronism.
Par Value in Bonds
When a company or government issues a bond, its par value represents the amount of money the bond will be worth at its maturity date.
For example, if a bond with a par value of $100 is purchased with a maturity date one year in the future, the bondholder is entitled to collect $100 from the issuing company at the end of that year (in addition to whatever interest payments the bond yielded.)
Most individual investors buy bonds because they represent a safe haven investment. The yield is paid in regular installments, providing income until the bond matures. Then the investor gets the original investment back. In other words, they intend to hold onto the bond until it matures.
Before its maturity date, though, the market value of the bond may fluctuate in the secondary market, as bond traders chase issues that offer a better return. But at the end of the year, when the bond reaches its maturity date, it will still be worth $100.
Par Value in Stocks
For stocks, it's the market value that matters.
Most stocks are assigned a par value at the time they are issued. In modern times, the par value assigned is a very low number, such as one penny. That avoids any potential legal liability if the stock drops below its par value. Some stocks are issued with no par, depending on state laws.
For most individual investors, the real value of a stock is determined by the market, and it fluctuates constantly as shares are bought and sold.
When Par Matters
The market value of both bonds and stocks is determined by the buying and selling activity of investors in the open market.
A bond can be purchased for more or less than its par value, depending on market sentiment. But when it reaches its maturity date, the bondholder is paid the par value regardless of the purchase price. Thus, a bond with a par value of $100 that is purchased for $80 in the secondary market will yield a 25% return at maturity.
Because stocks often have par values near zero, the market value is almost always higher than par. Rather than looking to purchase shares below par value, investors make money on the changing value of a stock over time.
Par Value, Market Value, and Stockholder Equity
Stockholders' equity is often referred to as the book value of a company. A company's stockholders' equity is recorded on its balance sheet, and the values signify the par value of the stock.
Stockholders' equity is most simply calculated as total assets minus total liabilities. It also may be calculated as the value of the shares retained by the company and the earnings retained by the company minus Treasury shares. Stockholders' equity includes paid-in capital, retained, par value of common stock, and par value of preferred stock. Therefore, shareholders' equity does not accurately reflect the market value of the company and is less important in the calculation of stockholders' equity.
The total value of assets reported on a company's balance sheet only reflects the cost of the assets at the time of the transaction. These assets do not reflect their current fair market values. To calculate the value of common stock, multiply the number of shares the company issues by the par value per share.
Similarly, the value of preferred stock is calculated by multiplying the number of preferred shares issued by the par value per share. Therefore, par value is more important to a company's stockholders' equity calculation.
Apple Inc.'s Equity, Par and Market Value
For example, as of Sept. 30, 2017, Apple Inc. (NASDAQ: AAPL) had total assets of $375.32 billion and $100.81 billion of total liabilities. Its resulting total stockholders' equity was $274.51 billion ($375.32 billion - $100.81 billion).
Similarly, Apple Inc. has common stock of $35.87 billion. This value is based on the par value and not the current fair market value. It also has retained earnings of $98.33 billion and -$150 million in other stockholder equity. Its resulting stockholders' equity, using the second method, is $133.85 billion ($35.87 billion + $98.33 billion + -$150 million).
- A bond's par value is the dollar amount it will be worth when it reaches maturity.
- Before its maturity date, the bond may sell for more or less than par value on the secondary market as the yield it pays becomes more or less attractive to buyers.
- Whoever owns that bond at the maturity date will get the par value, no more and no less.
- To the average stock investor, market value is what counts!