What Is Face Value?
Face value is a financial term used to describe a security’s nominal or dollar value as given by its issuer. For bonds, it’s the amount paid to the holder at maturity. The face value of bonds is often called “par value” or simply “par.”
For stocks, the face value is the stock’s original cost, as listed on the certificate. In reality, the par value of a stock is unimportant. It can be set at a low, arbitrary amount, especially in countries like the United States. Many U.S. companies deliberately issue stocks with very low par values due to specific state regulations. These rules tie the cost of incorporating a company to the par value of the registered shares. By assigning low par values to their stocks, companies can decrease their incorporation fees.
Below, we review what else you need to know about par or face value.
Key Takeaways
- Face value describes the nominal value or dollar value of a security; the issuing party gives the face value.
- A stock’s face value is its initial cost, indicated on its certificate.
- A bond’s face value is the dollar amount due to investors once it reaches maturity.
- The actual market value of a stock or a bond is not reliably indicated by its face value because many other influencing forces, such as supply and demand, are at play.
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Understanding Face Value
In bond investing, face value (par value) is the amount paid to a bondholder at the maturity date, as long as the bond issuer doesn’t default. However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest rates are higher than the bond’s coupon rate, then the bond is sold at a discount (below par).
Conversely, if interest rates are lower than the bond’s coupon rate, the bond is sold at a premium (above par). While the face value of a bond provides a guaranteed return, the face value of a stock is not an indicator of its actual worth.
Face Value and Bonds
A bond’s face value is the amount the issuer provides to the bondholder, once maturity is reached. A bond may either have an additional interest rate, or the profit may be based solely on the increase from a below-par original issue price and the face value at maturity.
While bond par values are generally static, a notable exception is inflation-linked bonds, whose par values are adjusted by inflation rates for preset periods.
Face Value and Stock Shares
The sum face value of the entirety of a company’s shares establishes the legal capital that a corporation is obligated to maintain. Only the above-and-beyond capital may be released to investors through dividends. In essence, the funds that cover the face value function as a type of default reserve.
However, there is no requirement dictating the face value businesses must list upon issue. This gives companies the leeway to use very low values to determine the size of the reserve. For example, the par value of AT&T Inc. (T) shares is listed as $1 per common share, while shares of Apple Inc. (AAPL) have a par value of $0.00001.
| The Different Kinds of Value in Finance | ||
|---|---|---|
| Value Type | Stocks | Bonds |
| Book Value | The value of a company’s assets minus its liabilities. It represents the theoretical value of a share if the company were liquidated. | Not applicable to bonds. |
| Face Value/Par Value/Nominal Value | The given value of a share, typically with little relevance in modern markets. Historically, it represented the initial price of the stock. | The amount the bond issuer promises to repay the bondholder at maturity. |
| Intrinsic Value | An estimate of a stock’s true value based on its underlying fundamentals, such as earnings, assets, and growth potential. | The present value of future cash flows (coupon payments and principal) from the bond, discounted at a rate reflecting the bond’s risk and interest rates. |
| Market Value | The present price at which a share is traded on the stock exchange. | The price at which a bond is being traded. This can fluctuate based on interest rates, credit risk, and market conditions. |
| Net Asset Value (NAV) | The value of a company’s total assets minus its liabilities, often used for mutual funds and exchange-traded funds (ETFs). Represents the per-share value of the fund’s holdings. | Not applicable to individual bonds, but can be relevant for bond funds. |
| Premium/Discount Value | Not directly applicable to stocks, but refers to a stock trading above (premium) or below (discount) its intrinsic value. | Refers to a bond trading above (premium) or below (discount) its face value. |
| Present Value | The value of a future stream of cash flows (dividends for stocks) discounted at a rate reflecting the risk and time value of money. | The present value of future cash flows (coupon payments and principal) from the bond, discounted at a rate reflecting the bond’s risk and prevailing market interest rates. |
| Principal Value | Not applicable to stocks. | The amount of money originally invested in the bond or the amount outstanding at a particular time. |
Face Value vs. Market Value
The face value of a stock or bond does not equal its actual market value. Market value is determined based on principles of supply and demand, which are governed by the dollar figure where investors are willing to buy and sell the security at a given time. Depending on market conditions, the face value and market value may have very little correlation.
In the bond market, interest rates (compared with the bond’s coupon rate) may determine if a bond sells above or below par. Zero-coupon bonds, or those where investors receive no interest, aside from that associated with purchasing the bond below face value, are generally only sold below par because that’s the only feasible way an investor can receive a profit.
Is Face Value the Same As Par Value?
Yes. Face value refers to the dollar value of a financial instrument when it is issued. The face value of a bond is the price that the issuer pays at the time of maturity, also referred to as “par value.” By comparison, the face value of a stock is the price set by the issuer when the stock is first issued.
What Is the Difference Between Face Value and Market Value?
While face value is the original price of a stock as set by its issuer, market value is influenced by supply and demand. Market value is the price that the market will bear, and it can differ significantly from a stock’s initial price. For example, the face value of Apple shares is $0.00001, while the market value of each of its shares at the close of trading on June 10, 2024, was $193.12.
What Is the Difference Between Face Value and a Bond’s Price?
A bond’s face value is fixed, often issued in $1,000 denominations. By contrast, its price fluctuates in response to market interest rates, time to maturity, and the issuer’s credit rating. A bond may be priced above par, or below par based on these conditions. For example, if interest rates increase, bond prices will decline, trading at a discount to face value in the secondary market.
What Is Book Value?
Book value is the net value of a company’s assets as recorded on its balance sheet. It’s calculated by subtracting a company’s total liabilities from its total assets. Essentially, book value reflects the amount that would be left over for shareholders if a company were to liquidate all its assets and pay off all its debts. This measure provides insight into a company’s intrinsic value and is often used by investors to gauge whether a stock is overvalued or undervalued.
The Bottom Line
In finance, face value refers to the nominal or dollar value of a security stated by the issuer. This is also known as “par value” or “par,” typically about bonds. Face value differs from market value, which is the security price based on supply and demand. With bonds, face value refers to the amount paid to the bondholder at maturity—although, as with stocks, bond market prices can fluctuate if sold on the secondary market.
Historically, face-value-ensured companies didn’t sell stocks below a specific price. As a data point in a time of limited information, face value also protected shareholders. For issuers, face value created a value expectation when shares were sold.
