par value vs face value

Par value is a term you may hear in relation to the value of a bond or share of stock. The more you know about what you are investing in, the less likely you are to invest in a product that isn’t right for you. For preferred stock, the face value sets the dividend issued on each unit of preferred stock. Existing and prospective investors could be assured that the issuer cannot legally sell shares at a price lower than the par value.

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. Par value is the amount that the issuer agrees to pay back to the investor at maturity. This is the amount that the investor will receive regardless of changes in the market value of the bond.

Free Financial Modeling Lessons

par value vs face value

As such, the market value of a security, particularly a stock, is of far greater relevance than the par value or face value. The face value is a fundamental concept in corporate finance, most often utilized to analyze securities like loans, corporate bonds, common stock, and preferred stock. Typically, the par value is set below $1 and has no connection with the market price. Par value is set at the time of issuing shares to the public and is usually not adjusted until stock splits take place. As such, there is no mathematical formula to calculate the par value of shares.

Par Value of Stocks

On the other hand, fair value refers to the price determined for an asset by a willing seller and buyer. As such, it is the agreed-upon value of a stock, an option contract, a bond, or any other financial asset between two parties. However, it is essential to note that the fair value is different from the market value, which is defined as the price of the asset being transacted in the market typically based on the market forces. If interest rates change to a value that exceeds the bond’s coupon rate, it is sold at a discount. Likewise, if interest rates should fall below the bond’s coupon rate, it is sold at a premium, or above par.

The face value (FV) on a bond is particularly important for calculating the yield to maturity (YTM). The S&P SmallCap 600 is a stock market index introduced by Standard & Poor’s. It covers a broad range of small-cap companies in the United States, providing a comprehensive benchmark for inve… Behind every blog post lies the combined experience of the people working at TIOmarkets. We are a team of dedicated industry professionals and financial markets enthusiasts committed to providing you with trading education and financial markets commentary. Our goal is to help empower you with the knowledge you need to trade in the markets effectively.

Subscribe to Kiplinger’s Personal Finance

The par value of stock has no relation to market value and, as a concept, is somewhat archaic.