Face Value: Definition in Finance, Comparison With Market Value

What Is Face Value?

Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. 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 to as "par value" or simply "par."

Understanding Face Value

In bond investing, face value (par value) is the amount paid to a bondholder at the maturity date, as long as the bond issuer doesn't default. However, bonds sold on the secondary market fluctuate with interest rates. For example, if interest rates are higher than the bond's coupon rate, then the bond is sold at a discount (below par).

Conversely, if interest rates are lower than the bond's coupon rate, the bond is sold at a premium (above par). While the face value of a bond provides for a guaranteed return, the face value of a stock is generally a poor indicator of actual worth.

Face value and bonds

A bond's face value is the amount the issuer provides to the bondholder, once maturity is reached. A bond may either have an additional interest rate, or the profit may be based solely on the increase from a below-par original issue price and the face value at maturity.

Face value and stock shares

The cumulative face value of the entirety of a company’s stock shares designates the legal capital a corporation is obligated to maintain. Only the above-and-beyond capital may be released to investors, in the form of dividends. In essence, the funds that cover the face value, function as a type of default reserve.

However, there is no requirement dictating the face value businesses must list upon issue. This affords businesses the leeway to use very low values to determine the size of the reserve. For example, the par value of AT&T shares is listed as $1 per common share, while shares of Apple Inc. have a par value of $0.00001.

Face Value vs. Market Value

The face value of a stock or bond does not denote the actual market value. Market value is determined based on principles of supply and demand. In turn, supply and demand is governed by the dollar figure where investors are willing to buy and sell the security, at a given time. In fact, depending on market conditions, the face value and market value may have very little correlation.

In the bond market, interest rates (compared with the bond’s coupon rate) may determine if a bond sells above or below par. Zero-coupon bonds, or those where investors receive no interest, aside from that associated with purchasing the bond below face value, are generally only sold below par because that's the only feasible way an investor can receive a profit.

The Bottom Line

In finance, face value refers to the nominal or dollar value of a security stated by the issuer. This is also known as "par value" or "par," typically in reference to bonds. Face value is not the same as market value which is the current value of the security, based on supply and demand. With bonds, face value refers to the amount paid to the holder of the bond at maturity—although, as with stocks, bond market prices can fluctuate if sold on the secondary market.

Historically, face value was used to ensure that companies didn't sell stocks below a specified price. As a data point in a time of limited information, face value also provided protection to shareholders. For issuers, face value created a value expectation when shares were sold. Finally, face value serves an important role when calculating bond prices. Interest is based on face value making the connection between face value and redemption value much more important face value of a stock.