Corporate Finance

Face Value

Step-by-Step Guide to Understanding Face Value

Last Updated August 7, 2024

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What is Face Value?

Face Value is the nominal or dollar value ascribed to a particular security, such as a bond or stock, by the issuer on the date of original issuance.

The face value of a security—often used interchangeably with the term, “Par Value”—is assigned at issuance and remains constant across the entire lifespan of the security, which could be structured with a fixed maturity or on a perpetual basis.

How Does Face Value Work?

The face value is a fundamental concept in corporate finance, most often utilized to analyze securities like loans, corporate bonds, common stock, and preferred stock.

The value ascribed to a financial instrument on the date of issuance, such as a corporate bond, is one of the core determinants of the implied return (or “yield”) attributable to a particular security, which dictates the investment and capital allocation decisions of investors in the market.

Generally speaking, the practical application of the face value (FV) concept is contingent on the security type:

Security	Description
Loans	A loan is a financial arrangement where a lender, most frequently a corporate bank, provides funds to a borrower with the agreement that the borrower must repay the principal plus interest over a specified term. The face value of a loan represents the original amount borrowed, which establishes the basis for the amount of interest owed over the course of the repayment schedule. The interest rate on bank loans—classified as senior debt—tends to be lower than other forms of riskier debt (and thus, a “cheaper” source of capital), with the drawback being the necessity to pledge collateral to secure the financing (i.e. lien).
Corporate Bonds	Corporate bonds are financing instruments issued by private and public companies alike to raise capital, which come with the obligation to repay the principal (or face value) at maturity alongside periodic interest payments. The face value of a corporate bond is the amount the issuer agrees to repay at maturity, which is used to calculate interest payments and serves as a benchmark for the bond’s market price (and bonds trade freely in the open markets, barring extraordinary circumstances).
Common Stock	Common stock represents partial ownership in a company, granting shareholders voting rights and receipt of potential dividends. The face value of common stock, often set at a nominal amount, is normally used for accounting purposes (i.e. bookkeeping) and does not accurately reflect the stock’s market value, or the true worth of the company’s equity. The actual market value of equity is measured by the market capitalization (“market cap”) or current stock price.
Preferred Stock	Preferred stock is a hybrid instrument that blends features of common stock and debt, and represents a class of ownership in a company with fixed dividend payments and priority over common stockholders in the event of liquidation. However, preferred stock is still considered beneath all forms of debt in terms of the overall capital stack (i.e. lower seniority in priority of repayment). The face value of preferred stock is used to calculate the value of dividend payments and represents the amount shareholders receive per share, assuming all higher-priority obligations are met.

Face Value vs. Par Value: What is the Difference?

Face value and par value are terms routinely used interchangeably but there is a very minor distinction that must be understood.

The face value refers to the nominal value printed on a financial instrument. For example, the face value of a bond is the amount that must be repaid at maturity (or the stated value of a stock at issuance — i.e. the minimal amount set in the corporate charter.

Likewise, the par value is the original nominal value of the instrument at issuance. The par value is often set to determine the minimum legal capital for stocks (i.e. an arbitrary figure for recordkeeping).

Both terms, the face and par value, refer to the value of a security at issuance, and therefore the repayment amount at maturity (or principal).

The subtle distinction appears when discussing the current value of bonds trading in the secondary markets (i.e. industry jargon).

If a bond is issued at the standard price point (i.e. $1,000), the bond is said to be issued at par. But if issued below or in excess of $1,000, the bond is said to be issued “below par” and “above par”, respectively.

Contingent on the interest rate environment and external factors, a bond can be issued at (and trade at) a discount, par, and premium to par (i.e. the value at issuance).

Discount Bond ➝ “Trading Below Par”
Par Bond ➝ “Trading at Par”
Premium Bond ➝ “Trading Above Par”

While a bond can be described as trading below its par value (“below par”), practically nobody would refer to the same bond as trading below its face value.

The only difference between the two terms is merely related to semantics and industry jargon; otherwise, the two are interchangeable concepts.

Face Value of Bonds vs. Stocks: What is the Difference?

To reiterate, the face value represents the total amount paid to the holder at maturity in the context of bonds, or more specifically, repaid to the holder by the borrower, along with periodic interest payments across the borrowing term (or tenor).

Higher Interest Rates ➝ When interest rates rise, the market price of bonds, or related financial instruments, tend to fall, as newer bonds are issued with higher coupon rates, making existing bonds less attractive.
Lower Interest Rates ➝ Conversely, when interest rates fall, the market price of bonds normally rise above its face value.

Credit risk also plays a role, as bonds from issuers with lower credit ratings may trade below their face value due to the perceived higher risk of default.

Furthermore, the time to maturity—or the number of years remaining until the date by which the principal must be repaid in-full—affects the market price, as bonds with longer maturities are more sensitive to interest rate changes.

On the other hand, in the case of stocks (or equity investments)—which can be categorized as either common stock or preferred stock—the face value reflects the original cost of the stock as stated on the certificate that formalizes the issuance (and receipt) of the security.

Bonds ➝ The face value of bonds is the amount the issuer agrees to repay the bondholder at maturity. The value is set when the bond is issued and remains constant throughout the bond’s life. Bonds come with the requirement to pay interest based on a stated coupon rate, which is applied to the face value. The coupon rate is expressed as a percentage of the face value and determines the periodic interest payments made to bondholders. At maturity, the bondholder receives the face value (i.e. principal) along with the final interest payment, clearing the borrower of all outstanding obligations.
Stocks ➝ The face value of stocks refers to the value stated on the stock certificate. The assigned value represents the minimum price for which shares can initially be sold during the issuance process. The face value of stock (or par value) is recorded on a company’s balance sheet under the shareholders’ equity section, representing the legal capital of the company. However, the face value of common stock, as mentioned earlier, does not necessarily reflect the actual market value (i.e. current value per the open markets).

Face Value vs. Market Value: What is the Difference?

Overview	Face Value	Market Value
Definition	The face value is the nominal amount set by the issuer, representing the value printed on the security certificate. Contrary to the market value, the face value—much like the book value concept—remains constant throughout the life of the security and is inherently stable (and not subject to market fluctuations).	The market value is the price at which the security is currently trading in the market. The market value of a bond or stock constantly fluctuates based on the company’s recent financial performance, industry trends, and investor sentiment. Unlike the face value, the market value reflects the actual worth of a security as determined by participants in the open markets (i.e. real prices paid via verifiable transaction activity).
Practical Application	The face value of bonds is critical because the amount reflects the repayment obligation (i.e. burden) at maturity and forms the basis for the interest burden across the borrowing term. The face value of stocks often serves a regulatory purpose, with minimal impact on the stock’s market performance.	In the case of both stocks and bonds, the current market value is critical as it indicates the security’s actual worth and is used by investors to guide decision-making. The market value reflects the actual trading price and is a direct indicator of investor sentiment and market conditions.
Determinants	The face value, or par value, is set by the issuer at the time of issuance and does not change. Hence, the book value of debt recognized on the balance sheet is often used as a proxy for the market value of debt, since the deviation is usually menial.	The market value is influenced by multiple factors, including the fundamentals of the underlying issuer’s operating performance (i.e. profitability, growth), market supply and demand, interest rate environment, and investor sentiment at present. However, the variance between the face value and market value of equity (or share price) can be substantial — while the deviation for debt instruments is minimal in most scenarios, unless the issuer is at risk of default (and insolvency).
Impact on Bonds and Stocks	The face value determines the amount repaid to the bondholder at maturity and influences the calculation of coupon payments. The par value represents the original cost of the stock as stated on the certificate, often set very low in modern times (e.g. $0.0001).	The market value of bonds can fluctuate based on interest rates and the issuer’s creditworthiness, potentially trading at a premium or discount to the face value. The actual market value represents the stock’s current trading price, and is influenced by recent operating performance, investor sentiment, and broader market trends.
Investor Considerations	The face value provides a baseline for understanding the repayment amount for bonds at maturity.	The market value is essential for making informed investment decisions, as it reflects the security’s current worth (or estimated intrinsic value, per the open markets), pricing in forward-looking projections with regard to future performance.

How to Calculate Face Value of Bond

The face value is seldom manually calculated in practice, considering the fact that the assigned value is readily accessible and stated on the coiciding certificate of issuance.

Still, conceptualizing the face value and understanding its impact on returns is a necessity for industry practitioners because the face value serves as the basis of computing the interest owed on bond issuances.

The face value of a bond can be found on the bond certificate, or indenture, and is thereby not required to be calculated. However, the face value is an input on a multitude of metrics used to analyze a bond issuance, such as the coupon (i.e. interest) and yield.

By multiplying the face value by the coupon rate, we can determine the periodic interest owed by the borrower—or coupon payment—as part of the financing arrangement.

The step-by-step process to calculate the coupon payment is as follows:

Step 1 ➝ Retrieve the Face Value from Bond Certificate (Indenture)
Step 2 ➝ Identify the Coupon Rate (and Adjust for Periodicity)
Step 3 ➝ Multiply the Face Value by the Annual Coupon Rate to Calculate Annual Coupon Payment

For example, suppose a bond has a face value of $1,000 and an annual coupon rate of 5%. The annual coupon payment is calculated by multiplying the face value by the annualized coupon rate (or interest rate), which comes out to an $50 coupon payment per annum.

Coupon Payment = $1,000 × 5.0% = $50

Given those figures, the $50 represents the periodic interest income received by the bondholder, so the bondholder is entitled to collect $50 in annual interest for holding the bond (and undertaking the risk), i.e. the credit risk is priced into the interest rate (or cost of debt).

The underlying logic behind the coupon payment formula is the interest paid to bondholders is the byproduct of the bond’s face value (or par value) and coupon rate.

Therefore, the face value can be perceived as the principal of the bond as of the date of issuance, while the coupon rate determines the percentage of the face value paid as interest.

The standard interest payment structure of a corporate bond issuance is a semi-annual basis (and to a much lesser degree, annual basis), but confirming the bond’s terms via the indenture is a required step, of course.

From the perspective of bondholders, the coupon payment is critical to quantify to understand the cash flow profile of a given bond investment because the return on the original principal is recouping the original investment contribution (or initial contribution), whereas the coupon (or interest payments) are the expected cash flow and source of yield in excess of being repaid in-full.

Most corporate bonds are issued at par, or $1,000 (“100”), albeit the value can be marginally trimmed to attract more demand from buyers in the market, which is formally referred to as an original issuance discount (OID).

By comparing the coupon payments to the bond’s market price, investors can evaluate the bond’s attractiveness relative to comparable investments (i.e. the opportunity cost of capital), facilitating better informed investment and capital allocation decisions, for purposes like constructing a well-diversified portfolio.

Face Value Formula

The coupon payment on a bond is calculated as of the product of the face value and coupon rate, or interest rate.

Coupon Payment = Face Value × Coupon Rate (%)

Where:

Face Value ➝ The nominal or dollar value of the bond stated by the issuer.
Coupon Rate (%) ➝ The annual interest rate paid on the bond, expressed as a percentage of the face value.

On the subject of analyzing the return profile of a potential investment, the formula to calculate the future value (FV) of a security is as follows:

Future Value (FV) = Present Value (PV) × [1 + (Interest Rate ÷ Number of Compounding Periods)] ^ (Number of Compounding Periods × Time)

Where:

Present Value (PV) ➝ The initial amount of capital invested into the stock of an issuer or loaned to the borrower (i.e. the original contribution). Here, the present value (PV) variable can be switched out with the face value of the security.
Interest Rate (r) ➝ The annual interest rate ascribed to the bond, or preferred stock.
Number of Compounding Periods (n) ➝ The total number of times in which interest is compounded per year (i.e. earning “interest on interest”).
Time (t) ➝ The total number of years the money is invested or borrowed for, or the number of years from the date of original issuance to the date of maturity.

How Does Compound Interest Impact Future Value?

Compounding refers to the process where the value of an investment increases because the earnings on an investment—inclusive of both the capital gains and interest component—earn interest with time (“interest on interest”).

Therefore, compound interest can significantly impact the future value (FV) of an investment.

Note, however, the face value of the security is fixed, irrespective of the compounding frequency. Instead, the frequency of compounding significantly affects the future value, especially over longer term periods.

In short, the higher the compounding frequency, the higher the return (or yield) on a bond issuance — all else being equal.

Suppose an institutional investor purchases corporate bonds issued at par, or $1,000 (“100”), priced at an annual interest rate of 5.0% and compounded on a semi-annual basis for 10 years.

If we insert the stated assumptions into the future value (FV) formula, we can estimate the value of the corporate bond at maturity:

Future Value (FV) = $1,000 × [1 + (5% ÷ 2)] ^ (2 × 10) = $1,638.62

Ensuring the right periodicity is applied is an essential step here, considering how influential different interest rates and compounding frequencies can affect the forward-looking size (and growth) of an investment security — not to mention, the standardization to an annualized basis facilitates comparative analysis on financing instruments structured with different terms (e.g. compounding frequency).

Face Value of Corporate Bond Calculation Example

Suppose a publicly-traded consumer goods company decides to raise capital via the issuance of corporate bonds to fund the production of a new manufacturing facility.

The company issues 10-year bonds with a face value of $1,000 (“100”)—i.e. at par—priced at an annual coupon rate of 4.5% with a semi-annual payment structure.

Face Value = $1,000 (“100”)
Coupon Rate (%) = 4.5%
Compounding Frequency = Semi-Annual (2.0x)

Therefore, the bondholders that decide to partake in the capital raise can purchase the bonds at their face value, and in exchange, are entitled to receive semi-annual coupon payments and receipt of the full principal at maturity.

Hypothetically, if a retail investor decides to purchase ten bonds—investing a total of $10,000—the investor should expect to receive a coupon payment of $22.50 on each bond per six months until maturity.

Coupon Payment (Semi-Annual) = $1,000 × (4.5% ÷ 2) = $22.50 per bond

The semi-annual coupon payment attributable to each bond was computed by multiplying the face value of the bond (or par value) by the coupon rate divided by two.

The latter step, where the coupon rate is adjusted, is necessary to reflect the fact that interest is paid on a semi-annual basis.

Given the assumption that a total of ten bonds were purchased, the retail investor is entitled to collect a total of $225 each six months.

Total Coupon Payment (Semi-Annual) = $22.50 × 10 = $225.00

In closing, the investor—assuming the bond is held until maturity—should receive a total of $4.5k across the ten-year borrowing term, on top of recouping the original face value ($10k).

Cumulative Coupon Payment (10-Year Hold) = $225 × 20 = $4,500.00

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