Definition of Face Value
Face value, commonly referred to as par value, is the nominal value assigned to a security at the time of its issuance. For bonds, face value represents the amount the bondholder will receive at maturity, whereas for stocks, it typically denotes the minimum price set upon issuance.
In the context of bonds, the face value serves as a critical benchmark for the interest rate calculation and the maturity value. For stocks, although the face value may not directly impact the market price, it holds significance in determining the accounting value and legal capital requirements for a company.
Examples
Bonds
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U.S. Treasury Bonds: A U.S. Treasury bond may have a face value of $1,000, meaning the investor will receive $1,000 when the bond matures. Additionally, interest payments will be calculated based on this face value.
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Corporate Bonds: A corporate bond issued by company XYZ might have a face value of $500. Investors buying this bond will receive periodic interest payments based on this amount, and upon maturity, they will be reimbursed the full face value of $500.
Stocks
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Common Stock: Suppose a company’s common stock has a face value of $1 per share. This value is often represented in the equity section of the company’s balance sheet and serves as a uniform valuation for accounting purposes.
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Preferred Stock: Preferred stock might have a face value of $100 per share. This face value often dictates dividend payments and is essential in the event of liquidation for determining shareholders’ payout.
Frequently Asked Questions (FAQs)
What is the significance of the face value in bonds?
Face value is crucial because it determines the bond’s redemption amount at maturity and serves as the reference point for calculating interest payments.
Is face value the same as market value?
No, face value is the nominal value set at issuance, while market value is determined by current trading conditions and investor sentiment.
Does face value change over time?
No, face value remains constant over the life of the security. However, the market value may fluctuate based on various factors.
How does face value impact stocks?
While face value generally has little influence on the stock’s market price, it plays a role in accounting and regulatory capital requirements.
What happens if the market value falls below the face value?
For bonds, if the market value falls below the face value, it indicates that the bond is trading at a discount. For stocks, this condition is less relevant as face value does not influence market performance.
Can a security have a face value of zero?
In some cases, such as no-par value stocks, a security can have a face value of zero.
Related Terms with Definitions
Par Value
- Par Value: Synonymous with face value, it represents the nominal or stated value of a security as declared by the issuer.
Market Value
- Market Value: The current price at which a security is traded in the market, influenced by supply, demand, and investor perception.
Coupon Rate
- Coupon Rate: The interest rate paid periodically by the issuer of the bond, calculated based on the bond’s face value.
Premium Bonds
- Premium Bonds: Bonds trading at a price higher than their face value. This usually occurs when the bond’s interest rate exceeds current market rates.
Discount Bonds
- Discount Bonds: Bonds trading below their face value, often due to the bond’s interest rate being lower than current market rates.
Online References
Suggested Books for Further Studies
- Investment Banking: Valuation, Leveraged Buyouts, and Mergers and Acquisitions by Joshua Rosenbaum and Joshua Pearl.
- Fundamentals of Financial Management by Eugene Brigham and Joel Houston.
- Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- The Bond Book by Annette Thau.
Accounting Basics: “Face Value” Fundamentals Quiz
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