What Is Face Value?
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."
Key Takeaways
- Face value describes the nominal value or dollar value of a security; the face value is stated by the issuing party.
- A stock's face value is the initial cost of the stock, as indicated on the certificate of the stock in question; a bond's face value is the dollar figure due to be paid to the investor, once the bond reaches maturity.
- The actual market value of a stock or a bond is not reliably indicated by its face value, because there are many other influencing forces at play, such as supply and demand.
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Understanding Face Value
In bond investing, face value (par value) is the amount paid to a bondholder at the maturity date, as long as the bond issuer doesn't 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 (below par).
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.
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.
Face value and bonds
A bond's face value is the amount the issuer provides to the bondholder, once maturity is reached. 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.
Face value and stock shares
The cumulative face value of the entirety of a company’s stock shares designates the legal capital a corporation is obligated to maintain. Only the above-and-beyond capital may be released to investors, in the form of dividends. In essence, the funds that cover the face value, function as a type of default reserve.
However, there is no requirement dictating the face value businesses must list upon issue. This affords businesses the leeway 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 shares of Apple Inc. have a par value of $0.00001.
Face Value vs. 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. In turn, supply and demand is governed by the dollar figure where investors are willing to buy and sell the security, at a given time. In fact, depending on market conditions, the face value and market value may have very little correlation.
In the bond market, interest rates (compared with the bond’s coupon rate) may determine if a bond sells above or below par. Zero-coupon bonds, or those where investors receive no interest, aside from that associated with purchasing the bond below face value, are generally only sold below par because that's the only feasible way an investor can receive a profit.
Is Face Value the Same As Par Value?
Yes. Face value refers to the dollar value of a financial instrument when it is issued. The face value of a bond is the price that the issuer pays at the time of maturity, also referred to as “par value.” By comparison, the face value of a stock is the price set by the issuer when the stock is first issued.
What Is the Difference Between Face Value and Market Value?
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. For example, the face value of Apple shares is $0.00001, while the market value of its shares can fluctuate above $100.
What Is the Difference Between Face Value and a Bond’s Price?
A bond’s face value is fixed, often issued in $1,000 denominations. By contrast, its price fluctuates in response to market interest rates, time to maturity, and the issuer’s credit rating. A bond may be priced above par, or below par based on these conditions. For example, if interest rates increase, bond prices will decline, trading at a discount to face value in the secondary market.
The Bottom Line
In finance, face value refers to the nominal or dollar value of a security stated by the issuer. This is also known as "par value" or "par," typically in reference to bonds. Face value is not the same as market value which is the current value of the security, based on supply and demand. With bonds, face value refers to the amount paid to the holder of the bond at maturity—although, as with stocks, bond market prices can fluctuate if sold on the secondary market.
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.
