Table of Contents Hide
- What is Face Value?
- What does the term “face value” in trading mean?
- Bonds and their Face Value
- Stock Shares and Face Value
- Why Does It Matter?
- In conclusion
- Face Value FAQs
- How important is face value of share?
- What if share price is less than face value?
- How do companies calculate the face value of share?
While face value is applicable to both stocks and bonds, it is significantly more relevant for bond investors. In its most basic form, face value is the notional value of a stock or bond. It’s the same number you’d find on a physical stock or bond certificate.
Learn what face value is, when it counts, and how to use it wisely in your investing. The face value will also be referred to as “par value.” Consider the phrases interchangeable, with par value appearing more frequently in connection with bonds.
What is Face Value?
When a corporation brings stock or a bond to market, the par value, or face value, is assigned as a “static value.” In contrast to market value, par or face value does not alter. The par value is printed on the stock or bond certificate.
The dividend amount is determined by the par value of the preferred stock. The par value of the common stock, on the other hand, isn’t particularly important to investors because they can’t purchase or sell shares at that price. Investors of a company’s common stock, on the other hand, pay market value, which is determined by supply and demand.
The majority of bonds have a par value of $100 or $1,000. For bonds, interest rates and credit ratings affect market value, which might be larger or less than the par value.
What does the term “face value” in trading mean?
In the realm of securities trading, the term “face value” is frequently employed. It’s also pretty popular in the field of insurance. An asset’s face value represents its value as declared by the institution that issued it.
Physical goods, such as coins, notes, or stamps, often have a face value equal to their nominal value.
Recognizing Face Value
In bond investment, face value (par value) is the amount paid to a bondholder at the maturity date, as long as the bond issuer does not default. Bonds sold on the secondary market, on the other hand, vary with interest rates. For instance, if interest rates are higher than the coupon rate on the bond, the bond is sold at a discount (below par).
If interest rates are lower than the bond’s coupon rate, the bond is offered at a discount (above par). While the face value of a bond guarantees a return, the face value of a stock is often a poor predictor of actual worth.
While the par value of bonds is normally fixed, inflation-linked bonds have a notable distinction in that their par value is changed by inflation rates over predetermined time periods.
The Fundamentals of Bonds
A bond is essentially a debt between an investor and an issuer. They are a type of investment security that is commonly issued by government bodies or enterprises in order to raise funds for a future project or endeavour.
Bonds have a fixed period; typically, the term of a bond spans from one to thirty years. There are short-term bonds (1-3 years), medium-term bonds (4-10 years), and long-term bonds within this time period (10 years or more). The maturity date is the end of this term. At this moment, investors receive the full face value of the bond.
The face value, however, is not the only return a bondholder will receive. You will also receive interest payments, which will be determined at the outset. The coupon rate of a bond is the rate at which these returns are earned, and payments are based on the face value. So, if a bond has a $1,000 face value and a 5% coupon rate, you will receive $50 in returns per year. This is in addition to the issuer repaying you the face value of the bond on its maturity date.
Bonds are often thought to be less risky than equity investments (stocks). However, nothing is a sure bet in investing. Bond investors must be concerned about default risk, which is the possibility that the issuing government or firm would go bankrupt and default on its loan commitments. They must also be concerned about interest rate risk, which is the risk that a change in interest rates would reduce the value of your bond. Check to discover if your bond paperwork specifies whether or not it is “callable.” In this case, holders of a called bond will get repayment before the maturity date, which is earlier than expected.
If you choose not to invest in individual bonds, there are numerous mutual funds and exchange-traded funds that specialize in fixed-income assets.
Bonds and their Face Value
The face value of a bond is the amount provided by the issuer to the bondholder at maturity. A bond may have an additional interest rate, or the profit may be entirely based on the difference between the original issuance price and the face value at maturity.
As a bond investor, you should be aware that when a bond matures, the bond issuer buys it back by paying the par value to the bond’s owner. The price of a bond varies from its par value as interest rates change. Rising interest rates often lead to declining bond prices; lowering interest rates lead to rising bond prices.
Bonds typically return to or around par value as they approach maturity.
Here’s a simple example to demonstrate bond face value:
A corporation issues bonds totalling $20,000,000. It can issue 20,000 bonds with a $1,000 par value, which the issuing business will repay at maturity. When the bonds are traded on the open market, their value can fluctuate. A bond can be traded for:
- Above-average: It sells for a higher price.
- Below par: It is traded at a loss.
- At face value: It is traded at its face value.
If a bond trades below par, it may suggest that a company’s finances are in jeopardy or that interest rates have risen since the bond was issued. If it trades over par, it indicates that the company’s credit rating has improved or that interest rates have fallen.
Finally, an examination of a company’s financial statements, as well as an awareness of the broader interest-rate environment, might assist you in deciding whether to purchase a certain bond.
Stock Shares and Face Value
The total face value of a corporation’s stock shares defines the legal capital that it is required to retain. Only the excess capital may be distributed to investors in the form of dividends. Essentially, the funds that cover the face value act as a form of default reserve.
However, there is no obligation that corporations declare the face value of each issuance. This allows firms to establish the size of the reserve using very low figures. AT&T shares, for example, have a par value of $1 per common share, whereas Apple Inc. shares have a par value of $0.00001.
Why Does It Matter?
Many bonds and preferred stock calculations rely on face value, including interest payments, market values, discounts, premiums, and yields.
The interest on a bond is often computed as a percentage of the face value, as illustrated in the example above. Furthermore, bondholders are frequently paid a percentage of the bond’s face value as a redemption premium if the borrower chooses to repay the obligation before it is due (known as a callable bond, this is often done on a sliding scale based on when the bonds are redeemed).
It is crucial to note that when it comes to stocks, face value (or par value) generally has no relationship to market pricing. Bond values, on the other hand, are largely impacted by their face value. Bonds are typically priced as a proportion of their face value. However, their values might rise above (premium) or fall below (discount) their face value due to changes in interest rates and the underlying issuer’s financial health.
Market Value vs. Face Value
The face value of a stock or bond does not represent its true market value, which is decided by supply and demand principles—often defined by the dollar amount at which investors are prepared to purchase and sell a certain instrument at a specific point in time. In fact, depending on market conditions, there may be a minimal correlation between the face value and market value.
Interest rates (when contrasted to the bond’s coupon rate) can impact whether a bond sells at or below par in the bond market. Zero-coupon bonds, or those in which investors earn no interest other than that connected with purchasing the bond below face value, are typically sold below par because it is the only realistic option for an investor to benefit.
Is Face Value and Par Value the Same Thing?
Yes. The dollar value of a financial instrument at the time it is issued is referred to as its face value. The face value of a bond is the price paid by the issuer at maturity, often known as “par value.” A stock’s face value, on the other hand, is the price set by the issuer when the stock is first issued.
What Is the Between Face Value and Market Value?
While face value is the initial price set by the issuer of a stock, market value is altered by external supply and demand forces. The market value of a stock is the price that the market will bear, and it can fluctuate dramatically from the initial price of the stock. Apple shares, for example, have a face value of $0.00001 but a market value that might exceed $100.
What Is the Difference Between a Bond’s Face Value and its Price?
The face value of a bond is set, and it is often issued in $1,000 denominations. Its price, on the other hand, varies in reaction to market interest rates, time to maturity, and the issuer’s credit rating. Based on these criteria, a bond may be priced above or below par. If interest rates rise, bond prices will fall, trading at a discount to face value in the secondary market.
The face value of a bond serves as a starting point for determining if it is a good investment for you. An investor can assess how much money a bond will eventually generate and its value relative to other bonds on the market by combining it with other criteria such as the coupon rate and time to maturity.
Aside from knowing the face value of your bond, be sure you understand its coupon dates. These are the crucial days when you’ll start receiving interest payments. While the frequency varies depending on the bond, it is normally annual or semi-annual. There are also zero-coupon bonds, which mean the bond issuer pays no interest on the face value of the bond.
Face Value FAQs
How important is face value of share?
Face value is important in the stock market since it helps to assess the market value of the stock, investments and returns, and premiums. The face value of stocks may also fluctuate as a result of business operations such as stock splits.
What if share price is less than face value?
It is selling at a discount or below par if the market value is less than the face value.
How do companies calculate the face value of share?
This simply refers to the value of the company’s shares on its books. It is determined by dividing the company’s net worth (the difference between its assets and liabilities) by the number of issued shares.