Face Value: What Is It?
A financial concept known as “face value” refers to a security’s issuer-stated nominal or monetary value. The face value of a stock is its initial purchase price, as shown on the certificate of ownership. It is the sum that bondholders receive at maturity; it is usually expressed in $1,000 denominations. Bond face value is commonly known as “par value” or just “par.”
Understanding the Face Value
When investing in bonds, face value, also known as par value, refers to the amount that, if the bond issuer doesn’t default, is paid to a bondholder on the maturity date. Nonetheless, secondary market bonds are subject to interest rate fluctuations. For instance, the bond is sold at a discount (below par) if interest rates exceed the bond’s coupon rate.
In contrast, a bond is sold at a premium (above par) if interest rates are lower than the coupon rate. The face value of a stock is typically not a good measure of its actual worth, whereas the face value of a bond guarantees a return.
Facial worth and ties
The amount that the bond issuer gives the bondholder when maturity is reached is known as the bond’s face value. A bond may be issued with an additional interest rate, or its profit could be calculated only from the difference between its face value at maturity and its initial, below-market issue price.
Shares of stock and face value
The total face value of a firm’s stock shares indicates the amount of legal capital that the company must keep on hand. Dividends may only be paid to investors on above-and-beyond capital. Essentially, the money needed to pay face value serves as a kind of default reserve.
There isn’t a rule governing the face value companies must disclose when they issue, though. This allows companies to choose the reserve size using shallow values. For instance, the par value of a common share of AT&T is listed as $1, whereas the par value of an Apple Inc. share is $0.00001.
Market Value versus Face Value
A stock or bond’s face value does not indicate its actual market worth. Market value is established using supply and demand principles. The asset’s supply and demand depend on investors’ current dollar willingness to buy and sell. Depending on the market, market value and face value may be slightly related.
Bonds trade at or below par, depending on interest and coupon rates. Zero-coupon bonds are sold below par since buyers can only profit from the interest paid for buying them below face value.
Are face value and par value the same thing?
Sure. The face value of a financial instrument is its initial dollar value at the time of issuance. The amount that the issuer must pay at bond maturity—also known as “par value”—is known as the bond’s face value. In contrast, the price that the issuer sets when the stock is initially issued is known as the face value of the store.
What distinguishes face value from market value?
Market value is determined by external supply and demand factors, whereas face value is the initial price of a stock as determined by its issuer. The price that the market will accept is known as market value, and it might be very different from a stock’s initial price. Apple shares, for instance, have a face value of $0.00001 but a market value subject to fluctuations exceeding $100.
What separates a bond’s face value from its price?
Bonds are often issued in $1,000 denominations with a fixed face value. Its price, however, varies according to the issuer’s credit rating, the time to maturity, and market interest rates. A bond’s price could be set above or below par, depending on these factors. Bond prices, for instance, will drop if interest rates rise. They will trade in the secondary market at a discount to face value.
The Final Word
The nominal or monetary value of a security declared by the issuer is called face value in the finance industry. This is sometimes referred to as “par value” or “par,” usually when discussing bonds. A security’s market value, which is based on supply and demand, is different from its face value. The amount paid to the bondholder at maturity is the bond’s face value. However, just like stocks, bond prices can change if they are sold on the secondary market.
In the past, face value was employed to ensure businesses didn’t sell their stocks for less than a certain amount. Face value shielded stockholders as well, acting as a data point in an era of incomplete information. When shares were sold, face value gave issuers an expectation of value. Lastly, face value is a significant factor in bond price computations. Since interest is determined on face value, a stock’s face value and redemption value are much more critical.
Conclusion
- The face value, which the issuing party declares, denotes the nominal or monetary worth of a security.
- The face value of a bond is the amount that must be paid to the investor when the bond matures, whereas the face value of a stock is the original cost of the stock as stated on the stock’s certificate.
- Because there are numerous other factors at play, such as supply and demand, the face value of a stock or bond may not always accurately reflect its true market worth.
