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.
- The par value of a stock is simply a nominal sum required for regulatory purposes.
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.
Bonds are not necessarily issued at their par value. They could also be issued at a premium or at a discount depending on factors like the level of interest rates in the economy.
For stocks, it's the market value that matters, not par.
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, the market value matters only if the bond is not held but is instead 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, its 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.
Par value for a share refers to the nominal stock value stated in the corporate charter. Shares can have no par value or very low par value, such as a fraction of one cent per share.
Par Value vs. Market Value Example
For example, as of the end of FY 2020, Apple Inc. (AAPL) had total assets of $323.89 billion and $258.55 billion of total liabilities. The company's resulting total stockholders' equity was $65.34 billion.
Its equity par value, however, was just $50.7 billion. This is based on $0.00001 par value: 50,400,000 shares authorized; 16,976,763 and 17,772,945 shares issued and outstanding, respectively.
Par Value vs. Market Value FAQs
When Do You Use the Market Value Method vs. the Par Value Method for Treasury Stock?
Treasury stock refers to previously outstanding stock that is bought back from stockholders by the issuing company. There are two methods to record a firm's treasury stock: the market value (cost) method and the par value method. The cost method uses the market value paid by the company during a repurchase of shares and ignores their par value; under this method, the cost of the treasury stock is included within the stockholders' equity portion of the balance sheet.
Under the par value method, at the time of share repurchase, the treasury stock account is debited, to decrease total shareholder's equity, in the amount of the par value of the shares being repurchased. It is common for stocks to have a minimum par value, such as $1, but sell and be repurchased for much more.
Why Use Par Value vs. Market Value?
For traders, especially of stocks, market value is what matters. For long-term bondholders, par value matters since this is the face amount of each bond that will be repaid as principal when the bond matures, regardless of what the market price is at any point in time.
Is Par Value the Same As Book Value?
No. Book value is the net value of a firm's assets found on its balance sheet, and it is roughly equal to the total amount all shareholders would get if they liquidated the company. Book value will often be greater than par value, but lower than market value.
What Is the Difference Between a Bond's Face Value and Par Value?
Nothing, the two terms are interchangeable. Par value for a bond is typically $1,000 or $100 because these are the usual denominations in which they are issued.
What Is It Called Par Value?
Par is said to be short for "parity," which refers to the condition where two (or more) things are equal to each other. Thus, a bond trading at its stated face value is trading at par. "Par" may also refer to scorekeeping in golf, where par is the number of strokes a player should normally require for a particular hole or course.