Investors can invest their resources in various financial instruments. Usually, these prefer to have share and debt instrument investments. Each of these instruments may come with unique features which differentiate them from the others. On top of those features, they may also come with various terms, which differ based on context.
One such area where these terms may differ includes the values for financial instruments. Usually, these instruments come with a value, which dictates how much the investor will pay for them. This value may differ based on whether the investor acquires the underlying security from the market or the issuer. In most cases, investors deal with the market, and, therefore, the market value may be highly crucial.
In some cases, other terms may also dictate the value or financial aspects of the underlying security. Of these, the par value and face value are highly crucial. However, they may relate to different scenarios or assets. In most cases, both of these have a similar meaning. Nonetheless, there may be some negligible differences between them as well. Before understanding that, it is crucial to discuss both terms separately.
What is Par Value?
Par value, or nominal value, is the minimum price for a security. Usually, this term applies to both bonds and stock. In both contexts, it has a similar meaning. However, the par value of bonds may be more critical than the par value of a stock. When companies issue both these instruments, they will charge a price from investors. The par value dictates how low this price can go. The term par value can differ according to the context to which it applies. Therefore, it is crucial to look at this term for both stocks and bonds.
Par value of Stocks
The par value of stocks is the price below which a company cannot sell its shares. Usually, companies set this amount in the articles of incorporation. This term applies to initial public offerings since it dictates the minimum value of the issued stock. In most jurisdictions, companies must set the par value for their stock before distribution.
However, the par value of a stock is not a significant concept. In most cases, the market value of a share is more critical in determining the amount that investors will pay for it. On top of that, companies usually issue their shares at a higher price than the par value. In some jurisdictions, companies can also distribute shares without setting this value. Instead, they can use no-par value shares.
Overall, the par value of stocks is a legal term that sets the minimum value of shares. This term is highly crucial for accounting purposes. However, it does not have any significance in most other cases. Except for the legal requirement, companies do not usually need this term. However, it can provide some benefits, particularly for investors and shareholders.
Par value of Bonds
Compared to the par value of stocks, the par value of bonds is significantly more crucial. This value is the amount of money that the investor will receive at the bond’s maturity date. In other words, it is the amount that the issuer repays the investor when the bond expires. The par value of bonds also provides a base for the interest payments associated with those bonds.
Unlike the par value of stocks, the par value of bonds does not fix the minimum issue price for the debt. Some companies may issue bonds at a higher or lower amount. If the price charged for this instrument is above the par value, it is known as a premium. In contrast, a lower price than par value is called a discount. However, the amount that the issuer receives for the bond does not change the repayment amount.
For bonds, the par value is one of the most crucial characteristics. Unlike the par value of shares, this amount can help determine the overall income that investors receive. For the company, it can establish the liability and expenses for the life of the bond. This value also relates to the bond’s maturity, which is when the issuer repays the investor the par value.
What is Face Value?
The concept of face value applies to bonds and stocks. However, it is more crucial to bond investors than for shareholders. Face value refers to the nominal value of a stock or bond. This value is also a part of the stock or bond certificate that companies issue. For investors, it is crucial to understand what the face value is and how it applies to their investments.
Face value is the amount assigned when a company issues stocks or bonds to the market. However, it differs from the market value, which is the price that investors will pay for those securities. In essence, the face value represents the minimum value of the underlying security. In most cases, the face value and par value are the same concept and apply similarly.
In essence, the face value represents a security’s worth, as stated by the institution that issues it. In the market, this value may differ based on several factors, including market forces. However, the issuer may also establish what the security is worth to them. Therefore, they will use the face value to dictate the security’s value to the market.
The concept of face value may also apply to other commodities, for example, coins, paper money, and stamps. In essence, it represents the amount mentioned on the security or asset by the issuer. For the above instances, each asset will have a value printed on it. Therefore, the face value refers to the amount the appears on the underlying asset. For shares and bonds, this amount will appear on the certificate.
Overall, the face value is an amount that appears on the underlying asset. For stocks and bonds, it is the amount that the company sets. Although it applies to stocks and bonds, it is more prevalent among bond investors than the former. Face value, in essence, refers to the security value set by the issuer. In most cases, it is the same as the par value.
Are Par value and Face Value the same?
For financial instruments, specifically stocks and bonds, there is no difference between par and face value. Both of these terms refer to the amount set by the issuer or underlying company for their security. Similarly, they represent the value stated in the financial statements for the underlying instrument during its issuance. In accounting, the face value and par value dictate the balance reported in the balance sheet.
The term par value applies to stocks and bonds. However, face value is more common among bond investors, although it relates to both. Apart from these instruments, this value may also apply to other assets or commodities. For example, coins, paper money, and stamps have a face value, which is the amount mentioned on them. In the case of stocks and bonds, this value appears on the certificates.
In most cases, par value and face value are the same. These terms are usually crucial for meeting legal requirements. In the case of stocks, the par or face value is not critical in most cases. It only helps companies satisfy laws and regulations. For bonds, on the other hand, these values can be highly crucial since they dictate the amount investors will get at maturity.
Although crucial, par and face values have little or no impact on the price that investors pay. Instead, the market value dictates how much investors must offer to receive the underlying asset. This value depends on several factors, for example, market forces, economic cycle, etc. However, it may not apply to accounting or legal matters.
Investors may come across various terms for their investments. Of these, the par and face value can be highly crucial. In most cases, these terms have a similar meaning or can be used interchangeably. Both par and face value apply to stocks and bonds. They relate to the entity that issues the security. However, they differ from the market value, which depends on the market.