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, 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.”
Key Takeaways
- Face value describes the nominal or dollar value of a security, as stated by the issuing party.
- A stock’s face value is the initial cost of the stock, as indicated on its certificate; a bond’s face value is the amount due to be paid to the investor once the bond reaches maturity.
- The actual market value of a stock or bond is not reliably indicated by its face value due to various influencing factors like supply and demand.
The Role of Face Value in Investments
Face Value and Bonds
In bond investing, face value (or par value) is the amount paid to a bondholder at the maturity date, assuming the issuer doesn’t default. Bonds sold on the secondary market fluctuate with interest rates. For instance, if interest rates are higher than the bond’s coupon rate, the bond sells at a discount (below par). Conversely, if interest rates are lower, the bond sells at a premium (above par).
While the face value of a bond ensures a guaranteed return, it is generally a poor indicator of the market value of a stock. Inflation-linked bonds can be an exception as their par value adjusts with inflation rates over time.
Face Value and Stock Shares
The cumulative face value of a company’s stock shares dictates the legal capital a corporation must maintain. Only capital exceeding this value may be distributed to investors as dividends. The funds covering the face value act as a form of default reserve.
However, businesses have the flexibility to list a very low face value. For example, AT&T lists its shares at $1 per common share, while Apple Inc.’s shares have a face value of only $0.00001.
Differences Between Face Value and Market Value
The face value of a stock or bond doesn’t denote its actual market value. Market value is determined based on supply and demand dynamics. These forces—which include investor sentiment, market trends, and economic conditions—set the market price of securities.
In the bond market, interest rates play a crucial role in whether a bond sells above or below par. Zero-coupon bonds, for instance, are typically sold below par because investors don’t receive interest payments but aim to profit from the bond’s appreciation to face value at maturity.
Clarifications on Face Value
Is Face Value the Same as Par Value?
Yes, face value and par value are one and the same. The face value of a bond is the amount the issuer pays at maturity, also known as par value. For stocks, face value is the price set by the issuer when the stock is first issued.
Face Value vs. Market Value
Face value is the original price of a stock, while market value is influenced by external forces and reflects the price at which the market is willing to trade the security. For example, although Apple’s face value per share is $0.00001, its market value can fluctuate above $100.
Face Value vs. Bond Price
A bond’s face value is fixed, traditionally issued in $1,000 denominations, but its market price varies due to interest rates, time to maturity, and the issuer’s credit rating. If interest rates rise, bond prices typically fall below face value.
Conclusion
In finance, face value represents the nominal or dollar value of a security stated by the issuer, often referred to as par value. It differs from market value, which is determined by real-time trading conditions. Whether dealing with stocks or bonds, understanding face value is essential for making informed investment decisions.
Historically, face value ensured that companies were prevented from selling stocks below a certain price, providing protection to shareholders and creating expectations for issuers. Today, while not a reliable indicator of market value, face value plays a vital role in bond pricing and issuing regulations.
Related Terms: nominal value, original cost, par value, premium, discount, coupon rate, dividend.
References
- Securities and Exchange Commission. “Schedule 10-K 2019”.
- AT&T. “2019 Annual Report”, Page 52.
- Corporate Finance Institute. “Face Value”.
