What is face value?
Face value is a financial term used to describe the face or dollar value of a security, as indicated by its issuer. For shares, the nominal value is the original cost of the action, as indicated on the certificate. For bonds, this is the amount paid to the bearer at maturity, which is usually $ 1,000. The face value of bonds is often called “face value” or simply “face value”.
Understand face value
In bond investment, the nominal value (nominal value) is the amount paid to a bondholder on the maturity date, as long as the bond 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 coupon rate, then the bond is sold at a discount (less than par).
Conversely, if interest rates are lower than the bond coupon rate, the bond is sold at a premium (greater than par). While the face value of a bond offers a guaranteed return, the face value of a stock is generally a poor indicator of actual value.
Although the face value of bonds is generally static, there is a notable exception for inflation-indexed bonds, the face value of which is adjusted by inflation rates for predetermined periods.
Face value and bonds
The face value of a bond is the amount that the issuer provides to the bond holder after maturity. A bond may have an additional interest rate or the profit may be based solely on the increase from the original issue price below the face value and the face value at maturity.
Face value and shares
The cumulative nominal value of all the shares of a company designates the legal capital that a company is required to maintain. Only the higher capital can be made available to investors in the form of dividends. In essence, funds that cover face value function as a default type of reserve.
However, there are no requirements that dictate the face value that companies must list at the time of issue. This gives companies the flexibility to use very low values to determine the size of the reserve. For example, the face value of AT&T shares is shown as $ 1 per common share, while the shares of Apple Inc. have a face value of $ 0.00001.
Key points to remember
- Face value describes the face value or dollar value of a security; the nominal value is indicated by the issuing party.
- The nominal value of a stock is the initial cost of the stock, as indicated on the certificate of the stock in question; the face value of a bond is the dollar amount that must be paid to the investor after the bond matures.
- The actual market value of a stock or bond is not reliably indicated by its face value, as many other forces of influence are at play, such as supply and demand.
Face value vs market value
The face value of a stock or bond does not match the actual market value, which is determined based on the principles of supply and demand – often governed by the dollar amount that investors are willing to buy and sell a particular security at a specific time. point in time. In fact, depending on market conditions, face value and market value may have very little correlation.
In the bond market, interest rates (relative to the bond coupon rate) can determine whether a bond sells above or below par. Bonds with zero coupon, or those where the investors receive no interest, apart from those associated with the purchase of the bond below their nominal value, are generally sold only below par because it is the only possible way for an investor to make a profit.