As financial markets fluctuate, so do security prices. If you’re interested in purchasing stocks, bonds, or any other type of financial security, you’ll need to know its face value for comparison. Find out more about the face value meaning below, along with how it compares to market value.
Understanding face value
The face value meaning refers to a financial security’s dollar value. When you purchase a stock at face value, this will be listed on the stock certificate as its original cost. If you’re purchasing a bond, it’s the amount paid out when the bond reaches maturity. The face value of a bond is also called its par value.
Understanding the face value of a bond
Face value is most used when talking about bond investments, so it’s helpful to take a closer look at how this works.
A bond is a type of investment security issued by either a private business or government organisation. It acts as a loan or promise between the issuer and investor, used as a way to drive up working capital for the issuer at the time of purchase.
When you purchase a bond, it usually comes with a defined term ranging from one to 30 years. The end of the term is called its maturity date, at which point the bond’s face value is paid to the investor. Bond holders also receive interest payments according to a defined coupon rate.
For example, if the face value of a bond is $1000 and its coupon rate is 3%, you would receive $30 in annual returns. You’d also receive the original face value back when the bond reaches its maturity date.
However, it’s also important to realise that bonds can be sold on a secondary market. In these cases, their value can fluctuate according to changes in interest rates. If interest rates are higher than the bond’s coupon rate, the bond is sold below par at a discount. If interest rates are lower than the coupon rate, the bond is sold above par at a premium. For this reason, the face value is not always indicative of a bond’s actual worth.
Face value of a bond vs. stock share
We’ve established above that the face value of a bond refers to the amount the issuer pays the investor once maturity has been reached. What about the face value meaning in relation to the stock market?
A stock’s face value is its original cost, but it’s also important to look at the bigger picture when investing. When you add together the entirety of a company’s stocks at face value, this is equal to its obligatory legal capital. The company can release capital above face value to investors as dividends.
In order to make sure that companies are able to cover their costs at face value, they often use a very low value per share. For example, shares of Apple Inc. have been listed with a face value as low as $0.00001.
Face value vs. market value
Face value gives you some idea of a stock or bond’s pricing, but it doesn’t always line up with the security’s actual value. The real-time value of a stock or bond is called its market value.
Market value gives a more accurate picture of what a bond is really worth, because it reflects what someone will pay for it on the open market. While face value is predetermined when the stock or bond is originally issued, market value takes a multitude of factors into account. These include factors like interest rates and the time remaining until a bond’s maturity. Market value also considers the issuer’s financial health, which has a major influence on the dollar value of both stocks and bonds.
The bottom line
Bonds are considered a relatively low-risk investment option, and face value gives you some indication of what the bond could be worth at maturity. However, in the case of both stocks and bonds you also need to take market value into account to make the right investment decision.
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