What Is Face Value?
If you’re considering investing in stocks or bonds, you may be wondering what is face value? Face value for bonds is also known as a par value and refers to the amount of money being paid to the holder once the bond reaches maturity. When it comes to stocks, the term refers to the initial value of the stock. Keep reading to learn more about this concept and why it’s important for understanding your return on investment.
Understanding a Bond's Face Value
Understanding face value is important because it tells you how much your bond is going to be worth once the term is over. In other words, this is the sum being paid to the bondholder by the issuer when the latter is buying back the bond. The face value is fixed and doesn’t change. A very common par value for bonds is $1000. In some cases, the face value can range from $100 to $1000.
However, bonds can be traded before they mature, and the actual price of the bond fluctuates due to a range of factors, including market interest rates, the time it takes for the bond to mature, and the issuer’s credit rating.
Taking the time to understand your bond investing face value will enable you to make better investment decisions in the future because the fluctuating interest rates on bonds sold on secondary markets can result in those bonds being sold below par (at a discounted rate), above par (at a premium rate), or at par (at face value).
Face Value vs. Market Value
A bond’s face value is very different from its market value. Face value is the amount of money that has been promised to the holder when the bond matures. The market value is how much someone is willing to pay for that bond based on market developments.
Face value is predetermined, and this amount is set when the bond is sold. Meanwhile, the market value is determined by a long list of factors. The key ones are interest rates and the time the bond takes to mature. And even though the face value is fixed, the market price of a bond can be affected by the financial health of the issuer. Therefore, if the company issuing the bond isn’t doing well in terms of its finances, the bond price may be driven down due to the perceived risk.
This term refers to the annual interest rate paid on a bond. The coupon rate is calculated by dividing the sum of the coupons paid during a 12-month period by the bond’s face value. The coupon payments are made from the time the bond is issued until it reaches maturity. The frequency of the interest payments depends on the bond that you have.
In most cases, the payments are semiannual or annual. You also have zero-coupon bonds, which means that the entity that is issuing the bond will not pay any interest on the face value of the bond.
Par Value vs. Face Value
When talking about the value of your financial investment, it doesn’t really matter whether you refer to it as par or face value. Both of these terms refer to the stated value of the financial entity at the time it is issued. That said, par value is normally used when talking about bonds rather than stocks.
Just like face value, the par value of bonds is the amount the issuer agrees to return to the purchaser when the bond matures.
When it comes to stocks, par value is typically set to comply with state regulations that don’t permit the sale of stocks below par value. In these instances, companies will set a par value at the lowest possible amount. Par value on stocks isn’t set when states don’t have such regulations.
Of course, just like with bonds, the actual market value of stocks is determined by the buying and selling of shares on the open market as well as other factors such as speculation.
Things to Know About Face Value and Stocks
It goes without saying that face value is an important financial instrument. But it doesn’t have a great deal of relevance when it comes to the amount of money that an investor has to pay in order to buy a bond or a share of stock. This is determined by the market value.
The prices of these securities are normally dictated by the psychology and the competing opinions of fellow investors. In short, the market value of a given stock, or bond, is usually far more important than the par value or face value.
What does it mean to pay face value?
For a stock, the face value is normally the original price stated for the stock. This will be listed on the stock certificate. If you are looking at bonds, the face value is the amount that is paid to the holder when the bond matures.
Who determines the value of a share?
There are no concrete guidelines for setting the face value of a share. Ultimately, this is determined by individual companies that are looking to raise funds for their projected needs. It can be calculated by taking the net worth or the difference in liability and assets and then splitting it amongst the number of shares issued.
Is face value the same as principal?
The term principal refers to several elements in the financial and business world. The meaning depends on the context in which the term is used. When it comes to borrowing and investments, it can have the same meaning as face value or the amount of money the bond issuer is obligated to repay. Principles can also be the main parties in a business transaction or those that have a leading role in running companies.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
More from blog
Your email address will not be published.