Face Value
The value printed or dedicated on a coin, banknotes, postage stamp and ticket.
What is Face Value?
The concept relates to securities' nominal or monetary value; the issuing party declares the face value. It's the printed amount on financial instruments such as banknotes, coins, or stamps that describe the nominal value of the instrument.
For example, a $1 bill comes with the mark of $1, the face value of the bill's worth.
Bond prices are calculated using this value, which is significant. This value determines the bond's interest rate. In contrast to stocks, the price of a bond is heavily influenced by the bond's face value.
Financial instruments may also be sold for their total face value, a discount, or a premium. For example, the demand for bonds with lower interest rates will decline as interest rates rise. To make the bonds more desirable, the issuer will sell them at a discount.
Today, we can acknowledge the worth of financial instruments, such as coins or a bill, simply by reading the face value imprinted on each device.
Key Takeaways
- Face value is the amount displayed on financial instruments such as banknotes, coins, bills, or stock certificates. Also known as par, the amount is constant since issuance unless the device is divided.
- A stock split is the only way to change the par amount of stocks or shares.
- The par amount of stocks denotes the standard as the companies' minimum limit to maintain stock prices and not sell below par.
- The par amount of bonds indicates the principal amount of a bond that is returned at maturity and can be used in pricing strategies.
- The par amount of insurance policies state the amount of the benefit specified in the insurance policy coverage.
- The par, market value, and book value are distinctively different. The market value indicates the current security price in the market, whereas book value is the price at which the current holder acquired the security.
Understanding Face Value
The printed amount on financial instruments such as banknotes, coins, or stamps describes the instrument's nominal value.
It helps us identify the worth and value of financial instruments. It comes in various forms involving different acronyms in different applications. For stocks or bonds, it is also known as par and usually indicates the original amount of worth at issuance.
For stocks and bonds, the par amount is printed on the certificates or on its physical form of instrument that denotes its worth at issuance. Par is also the bond maturity amount often indicated in $1,000 denominations.
Why is Face Value Important?
It is an excellent indicator for bond investors to use to calculate the actual worth of bonds.
The par amount is the standard for pricing the instrument depending on coupon rates when traded in secondary markets.
While the par of bonds provides information on investors' returns and set points of pricing strategy, the par of stock does not directly offer investors' guaranteed returns or indication of the stock's actual worth.
Face value and stock shares
In the world of equities and stocks, it is also often called par value, which describes the original cost of common stocks when they are first issued as printed on the stock's certificate.
Par values are not as relevant to many investors anymore since they cannot trade at that price. For preferred stocks, par value is used to determine the dividend amount. The dividend amount usually is shown in percentages based on the par value.
If a preferred stock is issued at a par value of $50 with a dividend rate of 2%, this stock pays $1 for its annual dividend. Individuals who own stocks no longer receive physical copies of their certificates, given the shift to digital documents.
However, at the time of existence, the imprinted value on the certificate symbolized the initial value of the stock when the company in the primary market initially issued it.
The Par Value of common stocks plays a vital role as a minimum set standard for issuing companies' shares to maintain the market price of common stocks.
The issuing company is obligated to be responsible for the difference if the company's market price falls below par.
Face value in Bonds and Fixed Income
In the world of fixed income, face value is often called par or maturity value which describes the bond's value when the bond is first issued. It is also called maturity value because par totals the principal amount paid back to the holder at the end of maturity.
This amount is often outlined in $1,000 denominations because bonds and typically treasuries have a minimum price limit costing at least $100,000 per single bond. If a treasury note is worth $100,000, the par value will be written or implied as $100.
The price of a bond after issuance may fluctuate in response to the market's variability, affecting the price. For example, a rise in interest rates or a decline in the issuer's credit rating may decrease the bond's price. Such market variability creates values above or below par.
On the other hand, the bond price may change depending on the amount of debt if someone decides to sell before maturity and external influence after issuance.
Note that the price of a bond at purchase and par value are two different values. The par was again the initial value when the bond was first issued from the issuer, while the price is the current price of the bond at which it is traded.
The price of bonds yet could be traded in the following based on the par value:
- If the price of a bond is above par, the bond is sold at a premium
- If the price of a bond is below par, the bond is sold at a discount
- If the price of a bond is the same as par, the bond is sold at par value
Zero-coupon bonds are bonds that do not pay additional interest and are usually sold at a discount. The only way investors can profit by purchasing a zero-coupon bond is by benefiting from the spread between purchasing price and the principal payment of the bond.
Note that for zero-coupon bonds, par remains the same as its original principal amount, initially issued while the price is sold at a discount.
Face value in an Insurance Policy
Insurance policies and annuities are also financial instruments or products that insurance companies offer.
The face value of insurance policies implies the initial amount of benefits written under the specified insurance policy.
Life insurance intends to cover the financial resources of people that may be impacted due to another individual's death. For example, one family member's death can result in a loss of household income and contribute to economic challenges in the household.
The death benefit from life insurance can support the household that faces economic losses impacted by a family member's death. These benefits can also be rerouted toward inheritance, donated to charity or trust, or paid to the beneficiaries.
Let's say a life insurance policy with a $1 million worth of death benefit was contracted between an insurance company and a customer. The face value of life insurance indicates the death benefit or the granted amount at the end of the policy period.
During the policy period, the customer is obligated to pay monthly or annual fees for the life of the insurance policy. These payments are called premiums.
For insurance policies, the benefit amount correlates with the obligated premiums the individual must pay. Thus, the higher the coverage amount of the policy gets, the more obligated premium payments increase.
In the case of life insurance, the death benefit becomes the actual base amount to state the face value and price of the insurance premiums.
Face Value vs. Market Value vs. Book Value
Face value, market value, and book value all interrelate with one another but have distinct meanings in different fields of finance. These three terms and their application differ depending on the instruments. First, we will begin with its application to equities and stocks.
For stocks, par is the original price of the security that is usually denoted on the stock's certificate. Also known as par, the number indicates the dollar amount when the deposit was primarily issued.
Market value, also known as the open market valuation (OMV), is the current price of single security in the marketplace.
The stock price fluctuates after issuance, dependent on situational volatility and the level of demand by investors, along with economic and political changes.
Book value is the price which the current holder purchased the instrument for. It measures the value amount at which the holder initially acquired the security, which helps calculate the investment's profit or loss.
Book value may be par or market value at some point in time.
Par is not equal to the market value. It is the initial recording of the importance of an instrument at issuance.
In contrast, the market value is open to change and fluctuates depending on the company's performance or market situation from the initial price.
It will be simpler to view par as the beginning value (fixed at issuance) versus the current value (which could have been appreciated or depreciated by its demand) for the two terms.
Let's see how these terms interrelate by reading the explanation and examples below.
Specifically, market value describes the current price of the financial instrument at a specific point in time. For example, if the stock of company A was first issued at $150 but is now at $120, then the par is $150, while the market value of the same security is $120.
Let's say John purchased the same company A's stock explained in the previous example at $120 about three months ago. Today, the stock price is at $140, and John decides to sell this to retain profit at the market price.
For this particular example, the three values align as follows:
- Par = $150 (the initial price of the stock)
- Market Value = $140 (the current price of the stock as of when John is selling)
- Book value = $120 (the price at which John acquired the store three months ago)
For bonds and fixed-income instruments, book value is also known as the carrying value and is the amount left for the issuer to pay back to the holder.
The book value of bonds can be calculated below:
Book Value = Par - Remaining Discount + Remaining Premium
When Does Face value Change?
It does not change in any financial instruments except for its application on stock-split. Par was the recording of the initial value when the device was first issued.
When a stock split occurs, a company's share is divided into two or more shares depending on what the company chooses to do. Let's say Company A announced a 2-for-1 stock split, which divides each stock into two.
If a shareholder held on to one share of Company A's stock while the 2-for-1 split was announced, the shareholder would be left with two claims after the break was applied. In this case, each stock's par amount is split into two.
If company A's original stock held a par of $150, the par of stock becomes $75 per stock after the 2-for-1 split occurs. If it were a 3-for-1 split, the par would be divided by three and become $50 per stock, with three stores remaining after the break.
Stock split helps companies reduce the chunk of stocks, proportionally reducing the current stock price and making it more accessible to a broader spectrum of investors.
Apple, for example, has had five stock splits ever since it claimed to be a publicly traded firm. This indicates how the company has grown over the past several decades and commemorates various levels of investors.
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