Face Value Definition
What is face value?
Par value is a financial term used to describe the nominal or dollar value of a security, as quoted by its issuer. For shares, the par value is the original cost of the share, as shown on the certificate. For bonds, this is the amount paid to the holder at maturity, usually in denominations of $1,000. The face value of bonds is often referred to as “face value” or simply “face value”.
Key points to remember
- Face value describes the face value or dollar value of a security; the face value is indicated by the issuing party.
- The nominal value of a share is the initial cost of the share, as indicated on the certificate of the share in question; the face value of a bond is the dollar amount that must be paid to the investor once the bond matures.
- The true market value of a stock or bond is not reliably indicated by its face value, as there are many other influencing forces at play, such as supply and demand.
Understanding face value
In bond investing, face value (face value) is the amount paid to a bondholder on the maturity date, as long as the issuer of the bond does not default. However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest rates are above the bond’s coupon rate, the bond is sold at a discount (below par).
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 offers a guaranteed return, the face value of a stock is generally a poor indicator of its true value.
While the face value of bonds is generally static, there is a noted exception with inflation-linked bonds, the face value of which is adjusted by rates of inflation for predetermined periods of time.
Face value and bonds
The face value of a bond is the amount that the issuer provides to the bondholder, once maturity is reached. A bond may either have an additional interest rate or the benefit may be based solely on the increase from an initial issue price below par and face value at maturity.
Par value and shares
The aggregate nominal value of all the shares of a company means the legal capital that a company is required to maintain. Only excess capital can be returned to investors, in the form of dividends. Essentially, funds that cover face value function as a sort of default reserve.
However, there is no requirement dictating the face value companies must list when issuing. This gives companies the leeway to use very low values to determine the size of the reserve. For example, the par value of AT&T shares is listed as $1 per common share, while shares of Apple Inc. have a par value of $0.00001.
Face Value vs Market Value
The par value of a stock or bond is not the actual market value, which is determined based on the principles of supply and demand – often governed by the dollar amount investors are willing to buy and sell a particular security, at a specific price. point in time. In fact, depending on market conditions, face value and market value may have very little correlation.
In the bond market, interest rates (relative to the bond’s coupon rate) can determine whether a bond sells above or below par. Zero-coupon bonds, or those for which investors receive no interest other than that associated with buying the bond below face value, are generally only sold below par, because c It is the only possible way for an investor to make a profit.
Is face value the same as face value?
Yes. Par value refers to the dollar value of a financial instrument when it is issued. The face value of a bond is the price the issuer pays at maturity, also known as the “face value”. In comparison, the par value of a share is the price set by the issuer when the share is first issued.
What is the difference between face value and market value?
While par value is the original price of a stock as defined by its issuer, market value is influenced by the external forces of supply and demand. Market value is the price the market will bear and it can differ significantly from the initial price of a stock. For example, the face value of Apple shares is $0.00001, while the market value of its shares can fluctuate above $100.
What is the difference between the face value and the price of a bond?
The face value of a bond is fixed, often issued in denominations of $1,000. On the other hand, its price fluctuates according to market interest rates, the term to maturity and the credit rating of the issuer. A bond may be priced above or below par depending on these conditions. For example, if interest rates rise, bond prices will fall, trading at a discount to face value in the secondary market.
The essential
In finance, face value refers to the nominal or dollar value of a security declared by the issuer. This is also known as “face value” or “par”, usually in reference to bonds. Face value is not the same as market value which is the current value of the security, based on supply and demand. With bonds, face value refers to the amount paid to the bondholder at maturity, although, as with stocks, bond market prices can fluctuate if sold in the secondary market.
Historically, face value was used to ensure that companies did not sell shares below a specified price. As a data point in an era of limited information, face value also provided protection for shareholders. For issuers, face value created an expectation of value when shares were sold. Finally, face value plays an important role in calculating bond prices. Interest is based on face value, which makes the connection between face value and redemption value much more important than the face value of a share.
