Par Value

Par Value

What is the face value?

The nominal value is the nominal value of a bond. Face value is important for a fixed income bond or instrument because it determines its value at maturity as well as the dollar value of coupon payments. The face value of a bond is generally $ 1,000 or $ 100. The market price of a bond may be higher or lower than normal, depending on factors such as the level of interest rates and the credit status of the bond.

Operation of the nominal value

The nominal value of a share refers to the value of the share indicated in the corporate charter. The shares generally have no face value or a very low face value, such as one cent per share. In the case of equity, the nominal value has very little to do with the stock market price.

The nominal value is also called nominal value or nominal value.

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Face value

Face value of bonds

One of the most important features of a bond is its face value. The face value is the amount of money that bond issuers promise to repay to bond holders on the bond maturity date. A bond is essentially a written promise that the amount loaned to the issuer will be repaid.

Bonds are not necessarily issued at face value. They could also be issued at a premium or at a discount depending on the level of interest rates in the economy. A bond that trades above par is said to trade at a premium, while a bond that trades below par is traded at a discount. During periods when interest rates are low or tend to fall, a greater proportion of bonds will trade above par or at premium. When interest rates are high, a greater proportion of bonds are traded at a discount. For example, a bond with a face value of $ 1,000 that is currently trading at $ 1,020 will trade at a premium, while another bond trading at $ 950 is considered a discount bond.

If an investor purchases a taxable bond at a price above par, the premium can be amortized over the remaining life of the bond, offsetting the interest received from the bond and, therefore, reducing the taxable income by the investor from the bond. This amortization of premiums is not available for non-taxable bonds purchased at a price higher than par.

The coupon rate of a bond relative to interest rates in the economy determines whether a bond will trade at par, below par or above its face value. The coupon rate corresponds to the interest payments paid to bondholders, annually or semi-annually, as compensation for the loan of a given amount to the issuer. For example, a bond with a face value of $ 1,000 and a coupon rate of 4% will have annual coupon payments of 4% x $ 1,000 = $ 40. A bond with a face value of $ 100 and a coupon rate of 4% will have annual coupon payments of 4% x $ 100 = $ 4. If a 4% coupon bond is issued when interest rates are 4%, the bond will trade at face value because the interest rates and coupons are the same.

However, if interest rates rise to 5%, the value of the bond will drop, causing it to trade below its face value. This is due to the fact that the bond pays a lower interest rate to its bond holders compared to the higher interest rate of 5% that similarly rated bonds will pay. The price of a lower coupon bond must therefore drop to offer the same 5% return to investors. On the other hand, if interest rates in the economy fall to 3%, the value of the bond will rise and trade above par since the coupon rate of 4% is more attractive than 3% .

Whether a bond is issued at a discount or at a premium, the issuer will reimburse the nominal value of the bond to the investor on the maturity date. Say, an investor buys a bond for $ 950 and another investor buys the same bond for $ 1020. On the maturity date of the bond, both investors will receive a redemption of $ 1,000 from the face value of the bond.

While the face value of a business bond is generally shown as $ 100 or $ 1,000, municipal bonds have a face value of $ 5,000 and federal bonds often have a face value of $ 10,000.

Nominal value of shares

Some states require that companies cannot sell stocks below their face value. To comply with state regulations, most companies set a nominal value for their inventory at a minimum amount. For example, the face value of Apple, Inc. shares is $ 0.00001 and the face value of Amazon shares is $ 0.01. Shares cannot be sold below this value during the IPO – in this way, investors are convinced that no one benefits from favorable price treatment.

Some states allow the issuance of a security with no par value. For these actions, there is no arbitrary amount above which a company can sell. An investor can identify shares with no par value on the share certificates as they will have “no par” printed on them. The nominal value of a company’s shares can be found in the Equity section of the balance sheet.

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