Face value, also known as par value or nominal value, is the original value of a securities as indicated by its issuer. It is a critical term in finance, notably for bonds and stocks, and indicates the amount that the issuer commits to repay the bondholder at maturity, or the value of a stock as stated in the company’s charter.
Face Value of Bonds
- Definition: A bond’s face value is the amount paid back to the bondholder at maturity. Most bonds have a face value of $1,000, though this might vary.
- Coupon Payments: Coupon payments, or interest payments, are calculated using the face value. For example, a bond with a face value of $1,000 and a 5% coupon rate pays $50 per year.
- Pricing: Bond prices might fluctuate above or below face value, based on interest rates, credit ratings, and market conditions. A bond trading above its face value is at a premium, whilst one trading below is at a discount.
Face Value of Stocks
- Definition: For stocks, face value is the value per share determined by the firm when they are issued. It is usually a small amount, like $1 or less.
- Accounting: Face value is reported on the company’s balance sheet in the equity section as part of share capital. It remains constant regardless of the stock’s market price.
- Market Price vs. Face Value: Supply and demand determine a stock’s market price, which might be much greater or lower than its face value.
Importance of Facial Value
- Bond Repayment: The amount payable at maturity is determined by the bond’s face value, which serves as a standard for pricing and interest calculations.
- Legal Capital: For stocks, face value represents the lowest price at which shares can be issued, guaranteeing that the corporation has a minimal capital base for creditor protection.
- Dividend computations: Some corporations base dividend computations on the face value of their shares, but this is less frequent in practice.
Limitations.
- Nominal Value: For stocks, face value is mostly symbolic and does not reflect the stock’s current market or intrinsic worth.
- Bond Pricing: The face value of bonds does not take into account market movements, interest rate changes, or the issuer’s credit risk.
Conclusion:
Face value is a fundamental concept in finance, used to calculate bond interest payments and define the nominal value of equities. While the practical implications differ between bonds and stocks, knowing face value is critical for investors and financial experts. It ensures clarity in payback amounts and interest computations for bonds, whereas it acts as a foundation for legal and accounting objectives in stocks. Despite its limits in representing current market conditions, face value is still an important factor in the issue and valuation of securities.