Face Value (Securities) - Explained
What is the Face Value of a Security?
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Table of ContentsWhat is the Face Value of a Security? How Does the Face Value of a Security Work?Face Value and BondsFace Value and Stock SharesFace Value and Market Value
What is the Face Value of a Security?
Face value is referred to as the dollar value or simply put, the nominal value of a security which is given by the issuer. As regards stocks or shares, face value is considered to be the total cost associated with the stock as revealed on the certificate. However, it is different for bonds as face value is taken to be the total amount disbursed to the holder when the bonds have fully matures which is usually around $1,000. It is commonly referred to as par and in some cases, par value
How Does the Face Value of a Security Work?
When it comes to bond investing and at maturity time of bonds, the total amount disbursed to the bondholder given that the supposed bond issuer does not fail to pay is regarded as the face value. On the other hand, it happens that interest rates affect bonds especially those traded on the secondary market as they tend to change as interest rates fluctuate. Take for instance, bonds are traded at a discounted rate if interest rate is way above the coupon rate of the bond. On the contrary, bonds are being sold at a premium given that the bonds coupon rate goes below the interest rate. The actual fact still remains that of course, you can expect a fail-safe return with the face value of a bond, it is often difficult to determine the definite worth of a stock by its face value as it is a poor gauge parameter.
Face Value and Bonds
At maturity, the bondholder is paid an amount by the issuer, and this amount is referred to as face value or par. There may be an extra interest rate imposed on a bond, or the profit may be generated specifically from the increased gained at below the par level of the original price and the face value at maturity.
Face Value and Stock Shares
The legal capital that a company needs to keep up in the business is a direct representation of its stock shares aggregate par or face value. When settling or paying investors, it is imperative to see to it that only funds that fall below this point or above can be touched. This implies that the funds which fall at this exact point will serve as a fallback or backup for the company. Nonetheless, there isn't any legal instruction or constraint that informs the company of what its face value should be upon issue and this enables many businesses to choose a relatively little values to maintain the extent of their reserve. For instance, AT$T has its face value at $1 per common share, whereas, Apple has its face value at $0.00001.
Face Value and Market Value
Talking about definite market value of a bond or stock, it is not determined by the face value or par of the stock or bond but rather determined with supply and demand in view. Market value is usually controlled by the dispositional activities of investors as to their willingness to buy or not, or sell an amount of security at a particular time. There may however be some form of overlapping similarities in face value and market value depending on the conditions surrounding the market a point in time. Whether a bond will sell above the face value or not in the bond market is often determined by interest rates just as it is with the bonds coupon rate. Bonds such as Zero-coupon bonds which does not allow for investors to enjoy any interest save for that related to buying the bond below par, are usually only sold below the face level as it stands as the only means for investors to receive profit.