Updated Mar 24, 2022

What is Face Value?

What is Face Value?

Introduction

Investors who have just entered the stock market may encounter many terms that can confuse them. Investment options in the stock market are aplenty, but one lesser-known security which not many people invest in is a bond. A bond is a type of debt security used by governments and other financial institutions to raise money. This results in financial stability and a possible rise in the country's Gross Domestic Profit.

Investing with a financial institution generally requires a minimum balance to be given initially, whether the assets are in cash or bonds and stocks. With this, the investor can select from several investment options to grow his investment and ultimately try and increase his earnings. This could mean diversifying the portfolio with different shares or even investing in bonds that give better returns.

What is Face Value?

Face value, or par value, is the term used in finance for the issuer's minimum currency value of a security. This term can differ between stocks and bonds. For instance, the face value of a share is the original cost listed on the share certificate or official document. For a bond, the face value refers to the amount paid to the bondholder at the time of bond maturity.

The Securities and Exchange Board of India (SEBI), which oversees the requirements for listing a public limited company in a stock exchange, sets the minimum face value as INR 1.

How Does Face Value Work with Bonds?

Depending on the investment plan, bonds can take time to mature. And the amount the bondholder receives at the end of this period is known as the face value. Ideally, this means that there is no default on the part of the bond issuer. The disadvantage of bond investing, however, is that the face value of the bond depends on market interest rates that tend to fluctuate quite regularly. So, for example, if the interest rates are higher than the bonds coupon rate, the investor's bond is sold below 'par' or face value.

How Does Face Value Work with Stocks?

When it comes to stocks and shares, the concept of face value is slightly different because these are equity investments that grow over time. The designated face value of a company or individual is the legal amount of capital every investor is expected to maintain, depending on their investment. The investors get only certain assets from the financial institution they are investing with, which is known as the face value. The face value can also act as a form of reserve funds to prevent default payments.

What is the Difference Between Face Value and Market Value?

The face value of a bond depends on the interest rate in the market, which is one main factor that determines whether they are sold above or below par. In this case, the face value and market value differ significantly. Therefore, when an investor receives a zero-coupon bond, the only way to make a profit on it is to sell it below par or look at the bond's market value and try and invest it in other ways.

The market value is defined as the amount of money that investors demand if they wish to buy or sell a particular security. But, of course, this depends on the type of bond, the time they want to sell their investment, market conditions, and interest rates. Therefore, it is clear that market value and face value have a very distant connection, if at all.

Conclusion

Bonds are generally safer investments because they depend on interest rates rather than the rates at which stocks fluctuate in the market on an almost daily basis. As a result, bonds are good, and when they reach maturity, investors are paid a certain amount known as face value. This can be considered a return on investment which can be reinvested into other bond plans. The definition of face value depends on the type of security one invests in. But it is generally the nominal value of a security that investors can expect a good return on investment. If the bond receives no interest, then the only way to get out of this predicament is to sell the bond below the market value or at a lower face value than one bought it at.