A:

The valuation of financial instruments can be expressed a number of different ways. Two of the most important valuations are par value and market value.

Par value, also called face value, refers to the stated value of the instrument at issuance. Market value, on the other hand, refers to the actual price investors pay for these securities. The par value is determined by the issuing entity and remains unchanged over time, but the market value is highly fluid and is dictated by the psychology of the marketplace.

Why It Matters

When a company issues bonds or shares of stock, each security has a par value. For bonds, the par value is the amount of money the issuing entity must pay the purchaser once the bond matures. If a bond with a par value of $100 is purchased with a maturity date one year in the future, then the bondholder is entitled to collect $100 from the issuing company at the end of that year.

The par value of stock is the value per share as stated in the issuing company's charter. This is the minimum amount that investors must pay per share in order to finance the company. This value is often very low to protect shareholders from financial liability if the company goes under.

The market value of bonds and stocks is determined by the buying and selling activity of all investors on the open market. A bond can be purchased for more or less than its par value, depending on market sentiment. Upon maturity, the bondholder is paid the par value, regardless of the purchase price; a bond with a par value of $100 that is purchased for $80 will yield a 25% return at maturity.

Because stocks often have par values near zero, the market value is almost always higher than par but is highly changeable. Rather than looking to purchase shares below par value, investors make money on the changing market 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. The market value of a company's stock is not influenced by its market price. A company's stockholders' equity is located on its balance sheet, and the values signify the par value of stock.

Stockholders' equity is calculated as total assets minus total liabilities, or share capital plus retained earnings 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.

The Apple Example

For example, as of September 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).

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