The Most Comprehensive Financial Dictionary with over 1000 Financial Terms Explained - Clear and Concise Article Style Description with Practical Examples

What means Face Value?

2016-12-14T17:08:51+00:00

The term 'Face Value' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Face Value represents the dollar value of a given security as the issuer states it officially. It is also otherwise known as the nominal value. Where stocks are concerned, this is the certificate-displayed original value of the stock. With bonds, this amounts to the dollar amount which will be paid back to the bond holder when the bond matures. This amount for bonds is usually $1,000 par value. Where bonds are concerned, this value is also called par value or sometimes only “par.” Par value is very important with bonds, while it means little to stock investors.

Par value is two completely different concepts when dealing with bonds versus stocks. With bonds, this refers to the full amount which the company will return to the bondholder at the time of maturity. This assumes that the issuer does not default on its bond principal. Despite this set face value to be returned at maturity, bonds which trade on the secondary market have market values which fluctuate every trading day based largely on the prevailing interest rates.

As an example, when interest rates prove to be greater than the coupon rate on the bond, the issue will be sold on the secondary market at a discount to par value. This means that the price will be lower than the par. At the same time, when interest rates turn out to be lower than the coupon rate of the bond, the bond sells for a premium, at higher than par. The par value still guarantees a fixed principal return in any case. Yet this value is considered to be a bad indicator of the current worth for the bond, given the fact that very few bonds actually trade for par on the secondary market.

Bond holders can make additional profits over their fixed interest rate. This opportunity lies in buying the bond at below face value, then holding it to receive the par at maturity date. This gap between sub-par purchase price on the secondary market and the par value at maturity becomes pure profit to the bond holder if they hold the bond until that eventual date is reached.

The face value where stocks are concerned is quite different from that par with bonds. The importance of stock shares’ par value as stated on their shares pertains to the legal amount of capital which the business must maintain. It is a fact that only cash the company has in excess of this total amount (number of shares times the share par value) may be paid out in the form of dividends to the investors. In practice this means that the face value of the shares serves as a type of corporate cash reserve.

The law does not mandate how much the stated par value has to be when it is issued. Businesses could sidestep the reserve requirement effect by applying laughably low values to the share certificates. Examples of two prominent companies illustrate this strategy well. AT&T shares have only $1 per common share listed as their par value. Stock giant Apple shares trading at hundreds of dollars apiece list a par value of merely $0.00001 per share, a ridiculous face value amount in practice.

This is why a stock or even bond’s face value rarely if ever determines the true market value of the relevant issue, especially with stocks. The market value is only based upon the market forces of supply and demand. This is decided in practice by how much investors will willingly pay for buying and selling shares on a given security at a particular snap shot moment in time. If market conditions are right, the par value and actual market value at any given moment may have little or nothing to do with each other.

With bonds and their markets, it is all about the prevailing interest rates and how they correlate to the coupon rate of the bond. This will generally decide whether the bond sells at, above, or below its par value. With zero coupon bonds, investors do not receive any interest besides buying the bond for less than its face value. These are sold for less than par as the sole means for investors to realize any profits in this case.

The term 'Face Value' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.