Learn what face value is, when it matters, and how to best consider it in your investing endeavors. We’ll also refer to face value as “par value.” Consider the terms interchangeable, with par value coming up more often in relation to bonds.
What Is Face Value?
Par value, or face value, is a “static value” assigned when a company brings stock or a bond to market. Unlike market value, par or face value doesn’t change. You’ll find the par value printed on the stock or bond certificate. The par value of preferred stock determines the amount of the dividend. However, the par value for common stock isn’t particularly relevant to investors since they can’t buy or sell shares at that price. Instead, investors in a company’s common stock pay market value, which is determined by supply and demand. Most bonds have a par value of $100 or $1,000. For bonds, interest rates and credit ratings determine market value, which can be greater or less than par value.
Face or Par Value and Bonds
As a bond investor, it’s important to know that at maturity, the bond issuer buys the bond back by paying the par value to the owner of that bond. As interest rates change, the price of a bond fluctuates from its par value. Rising rates typically mean falling bond prices; falling rates mean rising bond prices. Here’s a straightforward example to illustrate bond face value: A company issues bonds worth a total of $20,000,000. At a par value of $1,000, it can issue 20,000 bonds, which the issuing company pays back at maturity. When the bonds hit the open market, their value can change. A bond can trade:
Above par: It sells for a premium.Below par: It trades at a discount.At par: It trades at its par or face value.
If a bond trades below par, it can indicate a company’s financials are in question or that interest rates have risen since that bond’s issue. If it trades above par, the company’s credit rating may have improved or perhaps interest rates have declined. Ultimately, an assessment of a company’s financial statements, plus an understanding of the larger interest-rate environment can help you evaluate whether to purchase a specific bond.
Face Value and Stocks
The par value of preferred stock is an important consideration when assessing the profitability of owning preferred stock, as it helps determine its dividend payment. For example, if a company issues preferred stock at a par value of $100 with a 2% dividend rate, it will pay $2 per year in dividends. In this way, preferred stock functions like bonds. With common stock, face value is considerably less meaningful to everyday investors. It’s a regulatory requirement in some states where common stock cannot be issued for less than par value. It typically has no correlation with the market price of a stock, which is set by supply and demand.
