Par Value vs Face Value: What’s the Difference?

Selling bonds at a premium or a discount allows the purchasers of the bonds to earn the market rate of interest on their investment. At the end of ninth year, Valley would reclassify the bonds as a current liability because they will be paid within the next year. A bond that is trading above par is being sold at a premium and offers a coupon rate higher than the prevailing interest rates. Investors will pay more, as the yield or return is expected to be higher. On the other hand, a bond that is trading below par is on a discount trade, has a lower interest rate than the current market and it is sold at a lower price. Now consider that one company loans another $5,000 at an effective and stated rate of 10 percent due in three years.

Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the holder at maturity, typically high risk merchant account payment processing providers in $1,000 denominations. The face value of bonds is often referred to as “par value” or simply “par.” Face value can also apply to preferred stock, where the amount stated on a stock certificate is used to calculate the percentage dividend paid to investors.

• When each bond matures at a specified date, the company will pay back the value of $1,000 per bond to the lender.
• It typically has no correlation with the market price of a stock, which is set by supply and demand.
• This means that the bondholder is essentially lending ₹1,000 to the company.
• Face value may differ from the amount paid for a debt instrument, since the amount paid may incorporate a discount or premium from the face value.

Market value is calculated by multiplying the current stock price by the number of outstanding shares. Face value equals the equity share capital divided by the number of outstanding shares. Market value changes due to the prices of the equities purchased in stock exchanges. As elaborated in the table below, face Value and Market Value have significant differences in the stock market. The following factors portray the importance of Face Value in the share market.

What is the Importance of Par Value?

Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. For instance, a company going public may have a face value of Rs 10 and a market value of Rs 75. However, there are certain stocks whose face value is more than their market value. However, you must not confuse the face value with the market value of a share. For example, face value has no relation to the prevailing market price of the share. Receipt of the annual interest and amortization of the discount for the first year are recorded by Morgan as follows (amounts per amortization schedule).

• In this case, because the effective rate of interest (12 percent) is greater than the stated rate (10 percent), the present value of the note is less than the face value.
• A year later, as per the company’s financial statements show the equity value (total assets – total liabilities) increase to $120.
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• The cumulative face value of the entirety of a company’s stock shares designates the legal capital a corporation is obligated to maintain.

The face value of an insurance product is the death benefit, i.e., the amount that is paid out when the insured passes away. For example, a life insurance policy taken for $1 million is the face value of the insurance policy. The higher the face value, the higher the monthly or annual premium payments will be.

As interest rates change, the price of a bond fluctuates from its par value. Rising rates typically mean falling bond prices; falling rates mean rising bond prices. Face value refers to the dollar value of a financial instrument when it is issued. The face value of a stock or bond does not denote the actual market value.

What is the difference between the market value and the face value of a share?

Valley collected $5,000 from the bondholders on May 31 as accrued interest and is now returning it to them. The April 30 entry in the next year would include the accrued amount from December of last year and interest expense for Jan to April of this year. For bonds, the nominal value is the face value, which is the amount repaid to the bondholder at maturity.

It is reported on the balance sheet as a contra-asset account to notes receivable. The discount is then amortized, and interest revenue is recognized annually using the effective interest method. The 3-year discount amortization and interest revenue schedule is shown in Illustration 9 on the next page. For a company issuing a bond, the par value serves as a benchmark for pricing. When the bond is traded, the market price of the bond may be above or below par value, depending on factors such as the level of interest rates and the bond’s credit status.

How does the face value of shares impact investors?

Conversely, if interest rates are lower than the bond’s coupon rate, the bond is sold at a premium (above par). While the face value of a bond provides for a guaranteed return, the face value of a stock is generally a poor indicator of actual worth. Companies announce dividends on the face value of shares and not the market price.

Nominal Value of Stocks

When a company sells bonds to the public, many purchasers buy the bonds. Rather than deal with each purchaser individually, the issuing company appoints a trustee to represent the bondholders. The main duty of the trustee is to see that the borrower fulfills the provisions of the bond indenture. A bond indenture is the contract or loan agreement under which the bonds are issued.

Years ago, face value was used to make sure companies didn’t sell shares below a specific price. They were also set to protect the investor in the days of limited information. It also gave the investors confidence in knowing how much their investments were worth. By setting a value to the instrument, they would expect to sell nothing less than the face value. Face value is necessary during a share consolidation or stock split.

Its unamortized discount—additional interest revenue to be spread over the 3-year life of the note—is $480. For example, a customer has cash flow problems that keep it from paying for purchases. About the Author – Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya.