The face value

The face value, also known as par value or nominal value, refers to the nominal or dollar value of a security as stated by the issuer. It is the value of a financial instrument that is used for accounting purposes and is typically mentioned on the face of the security certificate. The face value is important for fixed-income securities such as bonds and preferred stocks.

Key points about face value:

1. Bond Face Value:

In the context of bonds, the face value is the amount that the bond will be worth at maturity. It is the amount that the issuer agrees to repay to the bondholder when the bond matures. Bond interest payments, known as coupon payments, are often calculated as a percentage of the face value.

2. Preferred Stock Face Value:

For preferred stocks, the face value represents the liquidation preference per share. In the event of the company’s liquidation or bankruptcy, preferred stockholders are entitled to receive the face value per share before common stockholders receive anything.

3. Importance in Accounting:

The face value is used for accounting and bookkeeping purposes. It helps determine the initial value of the financial instrument on the issuer’s balance sheet.

4. Not Necessarily Market Value:

The face value is not necessarily the market value or current trading price of a security. In the secondary market, the market value of a bond or preferred stock may be influenced by factors such as interest rates, credit risk, and market demand.

5. Inflation and Purchasing Power:

In the case of bonds, the face value does not account for changes in the purchasing power of money due to inflation. Therefore, the real value of the money repaid at maturity may be lower than the face value.

6. Currency Denomination:

The face value is denominated in the currency in which the security is issued. For example, a bond issued in U.S. dollars will have a face value stated in U.S. dollars.

7. $1,000 Face Value Convention:

Many bonds and preferred stocks have a face value of $1,000, although this is not a universal standard. A bond with a face value of $1,000 that pays a 5% annual coupon would provide $50 in annual interest payments.

8. Zero-Coupon Bonds:

In the case of zero-coupon bonds, which do not pay periodic interest, the face value represents the amount the bondholder will receive at maturity. The difference between the purchase price and the face value represents the bondholder’s interest earnings.

It’s important for investors to distinguish between face value and market value when evaluating the worth of a security. While the face value has accounting and contractual significance, the market value reflects the current value of the security in the open market and may fluctuate based on various factors.