Face value refers to a financial term that indicates the nominal or dollar value assigned to a security by its issuer. In the case of bonds, it represents the sum paid to the holder when the bond matures. The face value of bonds is frequently referred to as “par value” or just “par.”
When it comes to stocks, the face value refers to the original price listed on the certificate. However, the par value of a stock doesn’t really matter in practice. It can be set at a minimal, random amount, particularly in places like the United States. A lot of U.S. companies intentionally issue stocks with very low par values because of certain state laws. These laws link the cost of starting a company to the par value of the shares that are registered. By giving their stocks low par values, companies can lower their incorporation costs.
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In bond investing, the par value is what a bondholder receives when the bond matures, provided the issuer doesn’t default. But keep in mind, bonds traded on the secondary market can change in price based on interest rates. For instance, if interest rates exceed the bond’s coupon rate, the bond will be sold at a discount (less than par).
On the flip side, when interest rates drop below the bond’s coupon rate, the bond gets sold at a premium (over par). Even though a bond’s face value guarantees a return, a stock’s par value doesn’t really reflect its true value.
Is Face Value the Same as Par Value?
Absolutely! Face value is basically the dollar amount of a financial instrument at the time it’s issued. For bonds, the par value is what the issuer pays back when it matures, which is also known as “par value.” On the other hand, for stocks, the par value is the price determined by the issuer when the stock is initially released.
Conclusion
Face value, often referred to as “par value” or simply “par,” is mainly associated with bonds. It’s important to note that par value is different from market value, which is determined by supply and demand dynamics. In the context of bonds, par value indicates the sum that will be paid to the bondholder upon maturity—though, similar to stocks, the prices of bonds can vary if they are sold in the secondary market.
In the past, companies that guaranteed par value didn’t allow their stocks to be sold for less than a certain price. During times when information was scarce, face value served as a safeguard for shareholders. For those issuing shares, par value established an expected value at the time of sale.