Face Value: Definition in Finance, Comparison With Market Value

That’s because they expect greater compensation when they loan money for longer periods of time. Also, the longer the maturity, the greater the effect of a change in interest rates on the bond’s price. Issuers usually quote bond prices as percentages of face value—100 means 100% of face value, 97 means a discounted price of  97% of face value, and 103 means a premium price of 103% of face value.

For bonds, it is the amount paid to the holder at maturity, typically in $1,000 denominations. The face value of bonds is often referred How The Face Value Of A Bond Differs From Its Price to as “par value” or simply “par.” This situation is considered normal because longer-term bonds have higher interest rate risk.

Time to Maturity

Interest payments are made to the investor at regular, specified intervals during the term of the loan, typically every six months. Face value, also known as par value, is the nominal or dollar value of a security, as stated by the issuer. Price is important when you intend https://kelleysbookkeeping.com/rules-of-debit-and-credit/ to trade bonds with other investors. A bond’s price is what investors are willing to pay for an existing bond. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.

• Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
• Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer.
• The par value also helps in the determination of coupon payments by the dollar value.
• Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility.
• They also need to worry about interest rate risk – that a change in prevailing interest rates will lower the value of your bond.
• To sell the bond in the secondary market, the price of the bond will have to fall about 1% (extra 0.5% per year x 2 years), so it will be trading at a discount to face value.
• As the bond nears its maturity date, the bond price naturally tends to move closer to par value.

Market value can often be more volatile and can vary depending on the current market conditions, such as supply and demand. Duration is, generally, a more accurate measure for small changes in interest rates. For larger interest rate changes, other factors may also impact a bond’s price. Yield to worst is the worst yield you may experience assuming the issuer does not default. While the par value of bonds is generally static, there is a noted exception with inflation-linked bonds, whose par value is adjusted by inflation rates for predetermined time periods. The principal amount of the loan is paid back at some specified future date.

Bonds

As the bond’s price varies, the price is described relative to the original par value, or face value; the bond is referred to as trading above par value or below par value. A bond’s par value is the dollar amount indicated on the certificate, wherein the calculation of interest and the actual amount to be paid to lenders at maturity date is set. A share of stock’s par value is the minimum contribution amount made by investors to purchase one share at the time of issue. Par value is the nominal or face value of a bond, share of stock, or coupon as indicated on a bond or stock certificate.

Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates.

Examples of the inverse relationship between bond price and yield

But the price may not take into account every factor that can impact the actual price you would be offered if you actually attempted to sell the bond. Similarly, the creditworthiness of the issuer will affect the bond’s price on the secondary market. If the issuer is financially strong, investors are willing to pay more since they are confident that the issuer will be capable of paying the interest on the bond and pay off the bond at maturity. But if the issuer encounters financial problems—and especially if it’s downgraded by one of the ratings agencies (for more, see Bond ratings)—then investors may become less confident in the issuer. The market price of a bond can also be affected by the financial health of its issuer.