What Is Face Value? — A Practical Guide for Investors
Key takeaways
– Face value (also called par value or par) is the nominal dollar value assigned to a security by its issuer.
– For bonds, face value is the amount repaid at maturity (commonly $1,000 per bond). For stocks, face (par) value is an arbitrary legal number often set very low and rarely meaningful to investors.
– Market value (price) is determined by supply and demand and can differ substantially from face value.
– Investors should use face value primarily to understand maturity payoffs and certain accounting/legal items; use yield-to-maturity (YTM), coupon, credit quality, and market price to evaluate bond investments.
What face value means
– Definition: The nominal dollar value printed on a security by its issuer.
– Bonds: Face value is the principal repaid at maturity (e.g., $1,000). Coupon interest payments are typically based on this amount.
– Stocks: Par value is the legal capital per share stated in the corporate charter. It is often a tiny, arbitrary number that has little bearing on market price.
Face value and bonds
– Purpose: Guarantees the principal amount the issuer must repay at maturity (absent default).
– Coupon vs. face: Coupons are interest payments computed from face value. Example: a 5% coupon on a $1,000 face bond pays $50/year.
– Price behavior: A bond’s market price moves with prevailing interest rates and credit risk. If market interest rates rise above the coupon rate, the bond typically trades below face (discount). If rates fall, the bond may trade above face (premium).
– Pricing formula (annual-pay bond): Price = C * [1 − (1 + r)^−n]/r + F / (1 + r)^n
– C = annual coupon payment, r = market interest rate per period, n = number of periods, F = face value.
– Example (practical calculation):
– Bond: F = $1,000, coupon = 5% ⇒ C = $50, maturity = 10 years.
– If market rate r = 7%: Price ≈ $859.5 (discount below $1,000).
– If market rate r = 3%: Price ≈ $1,170.4 (premium above $1,000).
– Zero-coupon bonds: Sold below face, no periodic coupons; investor’s profit is the difference between purchase price and face at maturity.
Face value and stock shares
– Par value: Historically created to protect creditors/shareholders; today often set at a very low amount (examples: some firms set par at $1.00, others at fractions of a cent).
– Practical impact: Par value is mostly an incorporation/legal formality; it does not reflect market value. Companies set low par values to reduce fees and legal capital obligations in some jurisdictions.
– Legal capital: The aggregate face value of issued shares can determine the minimum capital a company must retain on its books in some jurisdictions (affecting dividends and distributions).
Face value vs. market value
– Face (par) value: The issuer-stated nominal amount.
– Market value (price): What investors are willing to pay now; driven by supply/demand, interest rates (for bonds), company performance, investor expectations (for stocks), and macro/credit conditions.
– For bonds, market price varies with interest rates, time to maturity, and credit quality. For stocks, market price reflects investor sentiment and fundamental expectations, not par.
Face value vs. bond price
– Face value = maturity principal.
– Bond price = current market value, which is the present value of remaining coupons plus the present value of the principal (face).
– Premium vs. discount: Price > face = premium; price < face = discount.
Book value vs. face value
– Book value (per share) = (Total assets − Total liabilities) / Shares outstanding. It attempts to measure net asset value and can be compared to market price to assess valuation.
– Face value is unrelated to a firm’s net asset backing; it does not measure intrinsic worth.
Is face value the same as par value?
– Yes—“face value” and “par value” are used interchangeably, especially for bonds. For stocks the term “par value” is more common, and it is largely symbolic in modern corporate practice.
Explain like I’m five
– Imagine you lend a friend $10 and they write on paper, “I’ll pay you $10 back in 1 year.” That $10 written on the paper is the face value. If other friends think your friend is risky, they might pay only $8 to buy the IOU from you. The $8 is the market price; the $10 on the paper is the face value you expect to get back.
Practical steps (for investors and company officers)
For bond investors
1. Read the bond prospectus (or offering documents) to confirm face value, coupon rate, maturity, and payment schedule.
2. Use market price and yield-to-maturity (YTM) rather than face value to evaluate return: compute YTM or use a bond calculator.
3. Check credit rating and issuer fundamentals (default risk affects the likelihood of receiving face value at maturity).
4. Consider interest-rate risk: longer maturities and lower coupons are more sensitive to market rate changes.
5. Use the bond price formula or a financial calculator to compare scenarios (e.g., if rates change, what happens to price).
6. For zero-coupon bonds, focus on purchase yield and tax treatment of imputed interest.
For stock investors
1. Don’t use par value as a valuation metric—focus on market price, earnings, cash flow, and book value per share.
2. When evaluating common shares, compare market price to book value per share, P/E, and other fundamentals.
3. Check the company charter only if you need to know legal capital, preferred share rights, or possible restrictions tied to par value.
For company founders / officers
1. When incorporating, set par value considering local corporate law and incorporation fees. Many choose a very low par value to minimize statutory capital.
2. Understand that the sum of par values of issued shares may affect legal capital requirements in some jurisdictions.
Important considerations and special cases
– Inflation-linked bonds: Face amounts may be adjusted for inflation (e.g., U.S. TIPS), so the “face” can change over time.
– Taxes: For bonds, imputed interest on original-issue discounts (OID) may be taxable before maturity—check tax rules.
– Corporate actions: Stock splits, dividends, or consolidations change the number of shares and per-share par value (in accounting), but not the company’s economic size.
– Default risk: If issuer defaults, receiving full face value is not guaranteed.
Quick checklist before buying a bond
– What is the face value and maturity date?
– What is the coupon rate and payment frequency?
– What is the current market price and the resulting YTM?
– What is the issuer’s credit rating and financial health?
– How will interest-rate changes affect price (duration)?
– Are there call or put provisions?
– How are taxes handled (especially for OID or tax-exempt bonds)?
The bottom line
Face value is an issuer-declared nominal amount: critical for understanding bond maturity payoffs and a legal formality for equity par value, but not a measure of market worth. Use market price, yield, credit quality, and fundamental metrics (for stocks, earnings and book value) when making investment decisions.
Sources
– Investopedia, “Face Value,” https://www.investopedia.com/terms/f/facevalue.asp
– Parameswaran, S., Fundamentals of Financial Instruments: An Introduction to Stocks, Bonds, Foreign Exchange, and Derivatives, John Wiley & Sons, 2022.
– Company investor relations and SEC filings (examples referenced in Investopedia article).