Face Value

Definition:

Face value is the principal amount or the stated value of a security, such as a bond, currency, or stock. It is the original amount paid for the security and is the amount that the holder of the security is entitled to receive upon maturity or redemption.

Example:

• A bond with a face value of $10,000 has a principal amount of $10,000.
• A currency denomination of $10 has a face value of $10.
• A stock with a par value of $100 has a face value of $100.

Factors Affecting Face Value:

• Interest rates: Face values are inversely related to interest rates. When interest rates rise, face values fall, and vice versa.
• Maturity date: Face values are higher for securities with longer maturities, as they offer a greater future return.
• Creditworthiness of issuer: For bonds, the face value is higher for securities issued by governments or companies with high credit ratings.
• Market demand: If there is high demand for a security, its face value may be above its par value.

Importance:

• Determining value: Face value is a key factor in determining the value of a security.
• Calculating returns: Face value is used to calculate returns on investment, such as interest rate and capital appreciation.
• Understanding security characteristics: Face value is an important characteristic that helps investors understand the underlying value and characteristics of a security.
• Speculation: Face values can be used for speculation, as investors can buy or sell securities based on their expectations for future prices.