The relationship between par value and face value is important because it determines the interest rate that the investor will receive. If the face value is lower than the par value, the bond will have a higher interest rate to compensate the investor for the lower face value. Conversely, if the face value is higher than the par value, the bond will have a lower interest rate. An investor might pay more than face value for a bond if the interest rate/yield they will receive on the bond is higher than the current rates offered in the bond market.

A bond’s par value is the face value of the bond plus coupon payments, annually or sem-annually, owed to the bondholders by the issuer of the debt. Par value, also known as nominal or original value, is the face value of a bond or the value of a stock certificate, as stated in the corporate charter. Par value is required for a bond or a fixed-income instrument and shows its maturity value and the dollar value of the coupon, or interest, payments due to the bondholder. When it comes to stock issuance, there are two terms that are commonly used – par value and face value.

The price of a bond can fluctuate in the market by changes in interest rates while the face value remains fixed. 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. Be sure to calculate your own yields-at-maturity or effective dividend payment rates to determine if the security you’re buying is a good deal for you.

Face Value and Stock Shares

Ultra-low par values also allow founders and early investors to buy shares in startups without expending a lot of capital. As with bonds and preferred stock, the final market value of a common stock has no relationship to its par value. When it comes to investing, understanding the difference between par value and face value is crucial.

Par Value Stock vs. No Par Value Stock: What’s the Difference?

Prevailing market interest rates change after a bond is issued, and bond prices must adjust to compensate investors. Suppose a three-year bond pays 3% when it is issued, and then market interest rates rise by half a percentage point a year later. It’s helpful to think of preferred stock as a hybrid of bonds and common stock. Preferred stock represents equity in a company—a portion of ownership, like common stock. In addition, though, you are entitled to fixed dividend payments, like a bond’s fixed interest payments.

If the bond is issued at par, it means that the price at issuance is equal to the par value. If the bond is issued at a premium or discount, the price will be higher or lower than the par value, respectively. Understanding the difference between par value and face value is important for investors and companies alike. While these terms may seem similar, they have distinct differences that can impact the value and trading of a stock. By carefully evaluating these factors, investors can make informed decisions about their investments and companies can ensure they are in compliance with legal requirements.

By knowing the face value of a security, investors can calculate the interest payable on the security, as well as the premium or discount at which it is trading. 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. Say you purchased a new bond from an issuer with a par value of $1,000—a very common par value for bonds—with a coupon of 4%.

But if you bought the same bond on the secondary market for $1,200, your effective interest rate would be 3.33%, rather than 4%. You’d still earn the same $40 in interest—it would simply represent a smaller percentage of what you paid for your bond. When you buy bonds, you’re lending money for a set amount of time to an issuer, like a government, municipality or corporation. The issuer promises to repay your initial investment—known as the principal—once the term is over, as well as pay you a set rate of interest over the life of the bond. Picture face value as the North Star of security, a value meticulously set by the issuer at the very moment of issuance.

Face value is also used to describe the price at which a security is being traded in the market. From a legal perspective, par value is the minimum amount that a company can issue a security for. It’s typically set at a low value, such as $0.01 per share, to comply with state laws that require a minimum issuance price. It’s a historical par value vs face value artifact that has little bearing on the actual value of a security. From the perspective of the issuer, par value is important because it determines the amount of money that the issuer will pay back to the investor at maturity.

Why Par Value Matters for Bond Investors

The issuance of par value stock does impact the presentation of the equity section of the balance sheet. Though the ultimate dollar amount isn’t impacted, this distinction provides transparency regarding the source of equity capital. Therefore, it is important from an accounting perspective that these two amounts are recorded differently. When a company issues shares, the par value of these shares is recorded in the common stock account on the balance sheet. A stock’s par value never fluctuates and is determined when shares are issued and formally stated on the stock certificate.

Both terms are used to describe the value of a security, but they represent different things. Par value is the nominal value of a security, while face value is the actual value of a security. It’s important to know when to use par value versus face value to make informed investment decisions. Understanding face value is important for investors, as it can help them make informed decisions when it comes to buying and selling securities.

While these two terms may seem similar, they have distinct differences that investors must understand when investing in bonds. YTM factors in the market price of a bond, its par value as well as any interest you may earn along the way. Understanding the importance of par value and face value is essential for anyone who wants to invest in the stock market.

1. The issuance of par value stock does impact the presentation of the equity section of the balance sheet.
2. For example, if a bond has a face value of $1,000 and a coupon rate of 5%, the bondholder will receive $50 in interest payments annually.
3. Although they may sound similar, they are two entirely different concepts that investors should be aware of.
4. Bond prices normally approach the face value, or par value, as they approach maturity.
5. On the other hand, par value is often different from the market value of a security.

Kat has expertise in insurance and student loans, and she holds certifications in student loan and financial education counseling. Consider par value as a non-negotiable baseline established by the company for its shares. High par value can limit flexibility, making it less friendly for small investors. On the flip side, low par value opens doors for more flexibility and invites everyone to the financial dance.

Even though par value may not be the price you pay for a security, it’s still important to be aware of as it may impact the amount of interest or dividend payments you receive. If you paid more than par value to buy a bond in the secondary market, the effective interest rate you’d earn on the bond would be lower than the coupon. If you paid less than par value for a bond, the effective interest you’d earn would be higher than the coupon. The par value is the amount of money a bond issuer promises to repay bondholders at maturity. The terms “par value” and “face value” are interchangeable and refer to the stated value of a financial instrument at the time it is issued. A bond’s face value is the amount the issuer provides to the bondholder, once maturity is reached.