What is ‘Face Value’
Face value is the nominal value or dollar value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate. For bonds, it is the amount paid to the holder at maturity, generally $1,000. It is also known as “par value” or simply “par.”
Explaining ‘Face Value’
In bond investing, face value, or par value, is the amount paid to a bondholder at the maturity date, given the issuer does not default. However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest rates are higher than the bond’s coupon rate, then the bond is sold at a discount, or below par. Conversely, if interest rates are lower than the bond’s coupon rate, then the bond is sold at a premium, or above par. While face value of a bond provides for a guaranteed return, the face value of a stock is often a poor indicator of actual worth.
Face Value and Bonds
The face value, or par, of a bond is the amount the issuer provides to the bond holder once maturity is reached. A bond may 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.
Face Value and Stock Shares
The cumulative face value of all of a company’s stock shares designates the legal capital that must be maintained in the business. Only funds above and beyond that point can be released out to investors as dividends, making the funds covering the face value function as a form of reserve. However, there is no requirement that dictates what must be listed as face value upon issue, allowing businesses 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 Apple shares have a par value of $0.00001.
Face Value and Market Value
The face value of a stock or bond does not denote the actual market value. Market value is determined based on principles of supply and demand, often governed by what investors are willing to buy and sell a particular security for at a specific point in time. Depending on market conditions, the face value and market value may have very little correlation.
- Financial intermediation as delegated monitoring: A simple example – papers.ssrn.com [PDF]
- The elasticity of financial assets – www.jstor.org [PDF]
- Managerial discretion and optimal financing policies – www.sciencedirect.com [PDF]
- Method of playing a game of economics and finance – patents.google.com [PDF]
- On the resolution of agency problems by complex financial instruments: A reply – www.jstor.org [PDF]
- Securitisation and financial stability – academic.oup.com [PDF]
- The determination of financial structure: the incentive-signalling approach – www.jstor.org [PDF]
- On the resolution of agency problems by complex financial instruments: a comment – www.jstor.org [PDF]
- Entrepreneurial finance: Banks versus venture capital – www.sciencedirect.com [PDF]