Face value definition
/What is Face Value?
Face value is the amount of a debt obligation that is stated as payable in a debt document. The face value does not include any of the interest or dividend payments that may later be paid over the term of the debt instrument. Face value may differ from the amount paid for a debt instrument, since the amount paid may incorporate a discount or premium from the face value. On the maturity date of the debt instrument, its issuer will redeem it for the face amount.
Face Value of a Bond
A common application of the face value term is in regard to the face value of a bond. This is the amount payable, as stated on the bond certificate. A typical bond face value is $1,000. The face value of a bond may also be known as its par value.
Face Value of Preferred Stock
Face value can also apply to preferred stock, where the amount stated on a stock certificate is used to calculate the percentage dividend paid to investors. For example, a $1,000 face value on a preferred stock certificate, when combined with a 7% dividend payment, means that $70 will be paid each year in dividends.
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Does Face Value Change Over Time?
Face value does not change over time because it is the fixed nominal value assigned by the issuer. What changes is the market value of the security, which fluctuates based on interest rates, supply and demand, and investor sentiment. Investors use face value as a benchmark, especially for bonds, since it represents the amount to be repaid at maturity.
How Does Face Value Differ from Market Value?
Face value is the nominal value of a financial instrument, while market value is the price at which it sells on the open market. The key differences between the two concepts are as follows:
Value changes. Face value is a fixed number, while market value fluctuates with changes in supply and demand.
Who determines. Face value is set by the issuer, while market value is set by the market.