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 assigns a par value to it. When shares of stocks and bonds were printed on paper, their par values were printed on the faces of the shares.
Market value, however, is the actual price that a financial instrument is worth at any given time for trade on the stock market. Market value constantly fluctuates with the ups and downs of the markets as investors buy and sell shares.
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.
- 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 stock investor, market value is what counts.
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 on to the bond until it matures.
Why Bond Prices Fluctuate
A bond can be purchased for more or less than its par value, depending on prevailing market sentiment about the security. However, when it reaches its maturity date, the bondholder is paid the par value regardless of if 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 shares of stocks will frequently have a par value near zero, the market value is nearly 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 based on company performance and investor sentiment.
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 minimal amount, 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.
The stock market will determine the real value of a stock, and it continually shifts as shares are bought and sold throughout the trading day.
Market Value in Bonds
For bonds, market matters only if the bond is traded in the secondary market. Before its maturity date, the market value of the bond fluctuates in the secondary market, as bond traders chase issues that offer a better return. However, when the bond reaches its maturity date, it's market value will be the same as its par value.
The market value of both bonds and stocks is determined by the buying and selling activity of investors in the open market.
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 a company's total assets minus its total liabilities. Another calculation is as the value of the shares held or retained by the company and the earnings that the company keeps 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 (FMV). 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 the 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.
Example of Apple's Par Value vs. Market Value
For example, as of the end of 2018, Apple Inc. (AAPL) had total assets of $365.73 billion and $258.58 billion of total liabilities. The company's resulting total stockholders' equity was $107.15 billion. Its par value was just $40.2 billion.