What Is the Face Value of a Bond and How It Differs From Market Value
No, the face value of a security can vary depending on the type of security. Common stock typically has a face value of $1, but bonds typically have a face value of $1,000 or higher. Face value can also be used to calculate the cost basis of a security, which is used to determine the capital gains or losses when the security is sold. In the US, the face value is typically $1,000 for a corporate bond, $5,000 for a municipal bond and $10,000 for a government bond. We do not manage client funds or hold custody of assets, we help users connect with relevant financial advisors.
Shares of stock sold at a price above the par value would result in additional paid-in capital, reflected in the books of the company. Although the fluctuating market price of stocks has no effect on the books, par value has a legal bind on part of the company to its investors – no shares will be sold below that price. A bond that is trading above par is being sold at a premium and offers a coupon rate higher than the prevailing interest rates. Investors will pay more, as the yield or return is expected to be higher. On the other hand, a bond that is trading below par is on a discount trade, has a lower interest rate than the current market and it is sold at a lower price.
Face or Par Value and Bonds
Face value refers to the dollar value of a financial instrument when it is issued. A bond’s par value is the dollar amount indicated on the certificate, wherein the calculation of interest and the actual amount to be paid to lenders at maturity date is set. A share of stock’s par value is the minimum contribution amount made by investors to purchase one share at the time of issue. They are a common investment security issued by government organizations or businesses in an effort to drive capital for an upcoming project or initiative.
For example, the face value of Apple shares is $0.00001, while the market value of its shares can fluctuate above $100. Face value is the nominal or stated value of a security, while market value is the current value of a security as determined by supply and demand in the open market. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns).
A bond may either have an additional interest rate, or the profit may be based solely on the increase from a below-par original issue price and the face value at maturity. While the par value of bonds is generally static, there is a noted exception with inflation-linked bonds, whose par value is adjusted by inflation rates for predetermined time periods. The bond’s face value is used to calculate the cash interest payments required during the life of the bond, and it indicates the cash amount that must be paid at the maturity date. For bonds, interest rates and credit ratings determine market value, which can be greater or less than par value. Face value may occasionally be used as a reference point to determine market value, but the two values are often not the same. Market value can often be more volatile and can vary depending on the current market conditions, such as supply and demand.
What Is the Difference Between Face Value and a Bond’s Price?
Ultimately, an assessment of a company’s financial statements, plus an understanding of the larger interest-rate environment can help you evaluate whether to purchase a specific bond. Learn what face value is, when it matters, and how to best consider it in your investing endeavors. We’ll also refer to face value as “par value.” Consider the terms interchangeable, with par value coming up more often in relation to bonds. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.
While face value applies to both stocks and bonds, it’s a far more important consideration for bond investors. In its simplest terms, face value represents the nominal value of a stock or bond. It’s the number you used to see on a physical stock or bond certificate.
How to Determine the Par Value of a Share of Stock
Face value is the amount of money promised to the bondholder upon the bond’s maturity. By contrast, a bond’s market value is how much someone will pay for the bond on the free market. Face value is predetermined when the bond is sold; market value takes into account multiple outside factors. These include the current interest rate environment and the time to maturity (which in turn helps determine the value of all future interest payments). In finance, face value refers to the nominal or dollar value of a security stated by the issuer.
- When each bond matures at a specified date, the company will pay back the value of $1,000 per bond to the lender.
- The face value of a bond is the amount of money that the issuer agrees to pay back to the bondholder at maturity.
- This varies based on the interest rates that tend to increase or decrease with what’s happening in the economy as a whole.
Therefore, if the issuing company or government entity isn’t doing well financially, the bond’s price might be driven down because of the risk of default. Between the date that a bond is issued and the date that the bond matures, the discount, premium, and/or issue costs must be amortized to the account Interest Expense. On the maturity date, the maturity value will be removed when the bond issuer’s $1,000,000 payment is made to the one or more bondholders.
Market value vs face value
Par value, or face value, is a “static value” assigned when a company brings stock or a bond to market. Taking something at face value is a widely used idiom that means to accept something as it appears. This is the same when talking about bonds – at face value the bond might be worth $1,200, but this price may increase or decrease according to interest rates and the issuer’s market position. While face value is the original price of a stock as set by its issuer, market value is influenced by external supply-and-demand forces. Market value is the price that the market will bear, and it can differ significantly from a stock’s initial price.
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the holder at maturity, typically in $1,000 denominations. The face value of bonds is often referred to as “par value” or simply “par.” Par value is likewise important to aspiring entrepreneurs, who are starting to form a corporation. The capitalization target is readily configured if the company will set a value for each stock offered.
Bonds are generally considered safer investments than equity investments (stocks). Bond investors need to worry about default risk – that the issuing government or corporation will go bankrupt and default on its loan obligations. They also need to worry about interest rate risk – that a change in prevailing interest rates will lower the value of your bond.
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 provides for a guaranteed return, the face value of a stock is generally a poor indicator of actual worth. The par value also helps in the determination of coupon payments by the dollar value. Bonds are not always issued at their par value because they can be issued with either a premium or a discount. This varies based on the interest rates that tend to increase or decrease with what’s happening in the economy as a whole. The market price of a bond can also be affected by the financial health of its issuer.
Historically, face value was used to ensure that companies didn’t sell stocks below a specified price. As a data point in a time of limited information, face value also provided protection to shareholders. For issuers, face value created a value expectation when shares were sold. Finally, face value serves an important role when calculating bond prices. Interest is based on face value making the connection between face value and redemption value much more important face value of a stock.
Aside from knowing your bond’s face value, be sure you’re well-versed in its coupon dates. While frequency can vary from bond to bond, they’re usually annual or semi-annual. There are also zero-coupon bonds, which means that the bond issuer pays no interest on the bond’s face value. If you’d rather avoid investing in individual bonds, there are many mutual funds and exchange-traded funds that focus on fixed-income investments.