Face value

Before you rely on it

What to check

Keep it separate from market price when computing income.

The common error

Where people go wrong with face value

Calculating coupon income off the purchase price. Buy at a discount and the cash payments are still based on face, so income is higher than the coupon rate suggests relative to what you paid.

Worked through

Face value in plain numbers

A bond has a face value of $1,000. At maturity the issuer repays $1,000 no matter what the bond traded for in between. Suppose you buy it at 97, meaning $970 per bond, three years before maturity. You collect the coupons along the way and the $30 gain when it matures at face, so part of your return comes from the discount. Buy it at 103 and you pay $1,030 and receive $1,000 at the end, a loss of $30 that offsets some of the coupon income. Face value also sets the size of coupon payments, since the rate applies to it.

Easily confused

Face value and its neighbours

Face value is not the market price. It is also called par value or principal, the amount repaid at maturity. Market price moves with interest rates and credit quality, and can be above or below face. Face value on a stock certificate, or par value of a share, is different again: an accounting figure with little relationship to what the stock is worth. On a coupon bond, the coupon rate is a percentage of face, and the redemption value can differ from face if the bond is called at a premium.

In real decisions

Where face value turns up

Investors use face value to work out coupon payments, the amount returned at maturity and the discount or premium at purchase. Bond quotes are given as a percentage of face, so 98.5 means $985 per $1,000. Accountants use it when recording bonds issued or held. Ladder builders match the face values that mature in each year to cash needs; anyone buying bonds should know the minimum denomination, since it sets the size of purchases.

Know the edges

Where face value stops being reliable

Repayment at face value depends on the issuer paying. A bond in default may recover less. Inflation erodes the purchasing power of the face value over long periods. Callable bonds can be redeemed early, sometimes at a premium, and some structures, such as amortizing or inflation-linked bonds, repay differently from the standard case; check the bond's terms for how principal is repaid and any options that could change it.

Quick answers

What people ask about face value

Is face value the same as par? Yes. Par value and face value both describe the amount repaid at maturity, often $1,000 per bond.

Why does a bond trade below face value? Usually because market yields are higher than its coupon rate, or because investors see extra credit risk. The price rises toward face as maturity approaches, if the issuer pays.

Does face value change with inflation? Not on a standard bond. Inflation-linked bonds adjust the principal to a price index.

What is the minimum denomination of a bond? Many corporate bonds trade in $1,000 units and some in larger lots. Treasury securities can be bought in smaller amounts. Check the offering.