What is the Difference Between Par Value and Face Value?
🆚 Go to Comparative Table 🆚The terms "par value" and "face value" refer to the stated value of a financial instrument at the time it is issued, and they are often used interchangeably. Both concepts are most important for bonds, as they represent the amount of money a bond will be worth at the time of its maturity. Here are the key points about par value and face value:
- Par value and face value are the same thing, and they denote the minimum value of a security set by the issuer.
- With bonds, the par value is the amount of money that bond issuers agree to repay to the purchaser at the bond's maturity.
- The par value of stocks is mostly arbitrary and often issued to avoid any potential legal issues if the stock drops below its par value.
- The market value of a financial instrument is the current price at which it can be traded on the stock market, and it is determined by the supply and demand in the market.
In summary, par value and face value are terms that refer to the stated value of a financial instrument, such as a bond or a stock, at the time it is issued. These values are set by the issuing institution and are often used interchangeably. The market value, on the other hand, is the current price at which a financial instrument can be traded on the stock market and is determined by the supply and demand in the market.
Comparative Table: Par Value vs Face Value
The main difference between par value and face value lies in their applications and the financial instruments they are associated with. Here is a table summarizing the differences between par value and face value:
| Feature | Par Value | Face Value |
|---|---|---|
| Definition | Par value is the nominal value of a security, determined by the company at the time of issuance. | Face value is the actual value of a security, determined by the market. |
| Application | Par value is more commonly used with bonds. | Face value is more commonly used with stocks. |
| Importance | Par value is crucial for bonds, as it represents the amount of money that bond issuers agree to repay to the purchaser at the bond's maturity. | Face value is often arbitrary for stocks and is used to avoid potential legal issues if the stock drops below its par value. |
| Market Value | The par value of a bond will always pay that amount upon its maturity, but the market price of the bond may rise or fall from the face value as prevailing interest rates change. | The market value of a stock is determined by the market and can fluctuate based on various factors, such as the company's performance and market conditions. |
In summary, par value is the nominal value of a security, primarily associated with bonds, while face value is the actual value of a security, mainly associated with stocks. Both values are important for different reasons, but they represent different aspects of the investment and are used in different contexts.
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