What Is Face Value? Definition and Examples
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Summary:
Face value has multiple meanings depending on the context. It refers to the value of an asset or security as stated by the issuer at the time of purchase. Depending on the security purchased, face value may represent different amounts. The face value of a stock is the original price the investor paid, but a bond’s face value is the amount the holder receives once the bond reaches maturity. However, in the housing market, face value refers to the asking or listing price. Also referred to as “par value,” an asset may be sold above or below par depending on market fluctuations. In the context of home loans, face value may also refer to the principal of a mortgage.
Face value’s meaning is similar to how it sounds—it is the nominal value of something that is facing the public. Regarding an asset, this typically means the actual price of something printed on paper. For example, if you buy a ticket at a movie theater and $12 is printed on the face of the ticket, that ticket’s face value is $12. If you buy a ticket at $12 from the vendor and then sell it to your friend, say $8, you are selling the ticket for “$4 below face value.”
In the movie ticket world, this isn’t so commonplace. However, in the investment world, the concept of face value is a determining factor, driving people to buy and sell trillions of dollars worth of assets on a given day. Face value is commonly used in the stock market, as well as the bond market. However, it is also prevalent in real estate, particularly in today’s vastly undersupplied market.
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What is face value in the bond market?
Face value (sometimes referred to as “par value“) is frequently used in the bond market. The face value is the nominal value printed on a bond certificate when issued.
When an entity such as a company or government issues a bond, the face value is the dollar value that the bond issuer agrees to ultimately pay the investor when the bond reaches maturity. This is usually determined by the bond’s coupon rate or interest rate. However, the market price, apparent value, and market coupon rate may be significantly different than their face value.
Is par value the same as market value?
No, par value is what’s listed on paper at the time. The market value is determined by what individuals are willing to pay for it in a market based on supply and demand.
How to determine a bond’s face value
For instance, you buy a five-year government bond for the price of $10,000 that pays you 10% or $1,000 in interest at the bond’s maturity date. This is considered the original price for the bond. If when the bond matures after five years, you receive both your initial principal of $10,000 plus the $1,000 in interest, this bond was issued at face value and matured with payment at 10% face value.
However, it must be understood that if this happened, then the interest rate did not fluctuate over the five-year period. Although this is an ideal situation for most individuals looking for maximum stability in their investments, it is rarely the case.
With regards to bonds, the fluctuation of interest rates in either direction is what impacts the value of the bond. Typically, if the interest rate of the given bond goes up, it will be sold for below face value or below par. If the interest rate goes down, then the bond will be sold for more than face value or “above par.” This is commonly reflected in the issuer’s credit rating, which is based on perceived risk.
How is par value calculated?
Par value is calculated by looking at the value and interest rate of a financial instrument at the time of issuance. As long as interest rates don’t change, the bond will maintain its par value status.
Bond face value examples: government bonds during the EU financial crisis
The higher the interest rates, the lower the value of the bond. Bonds with high interest rates and low value are considered “junk bonds.”
A real-world example of this was the European Debt Crisis in 2010. Greece issued face value bonds in the past that traded way below par, with much higher interest rates. The higher the interest rates became, the more the bonds traded below face value. Bonds will change hands for lower than face value because of the financial health and viability of the company or government entity.
What happened with Greece specifically?
In the case of Greece, the main driver was their fiscal deficit and sovereign debt. Investors began to see that in order for Greece to function with the current system, it would have to keep operating at a substantial deficit. This, in turn, would drive them to take on more debt.
The concern about Greece’s internal finances and sovereign debt drove investors to drive up the market interest rates of the bonds. This drove down the actual value of the bonds to way below face value. You can see on the graph below the drastic increase in interest rates between 2010 and 2011.
The graph indicates that interest rates increased substantially from 2010 to 2011. If you bought a bond in, say, 2005 for low-interest rates and then tried to sell the bond in 2010 with sky-high interest rates, the actual market value of the bond you purchased would be way below par, or below face value.
On the other hand, if you purchased a bond in 2010 when interest rates were sky-high, and then sold the bond five years later in 2015 when interest rates were low, then you likely sold the bond for significantly higher than face value.
Pro Tip
When looking at a company or government-issued bonds, look at the entities’ ability to “pay back.” Make sure you pay attention to the current entities’ financial health and if their debt-to-income ratios are out of the ordinary or unsustainable.
Face value in the stock market
At issuance, face value is what is typically registered with the Securities and Exchange Commission. It is important to note that unlike the bond market, face value only applies to preferred stock and not common stock, which most individuals hold.
That being said, for those looking to move up the investment chain and purchase preferred stock, this is important information to know when selling shares or stock shares on the open market.
What is preferred stock?
When a company issues “preferred stock,” they typically issue stock at face value with an associated dividend. For instance, if preferred stock is issued or sold for $100 on the stock certificate with a 5% dividend rate, the stock will pay $5 per year. When issued, the face value of the stock is typically correlated to the total amount of money the company possesses and maintains in the business that can act as a reserve. Everything else above this face value is often paid in a dividend format.
This means that the face value of the stock and the market value of the stock can differ, sometimes substantially. Thus, if the $100 stock purchase is now paying a dividend of 10% or $10, it means the stock’s market value is most likely far above the stock’s face value.
Wondering where to find advisors that know which stocks trade at rates better than face or market value? Here are some of our recommendations for investment advisors.
What is the purpose of a stock’s par value?
Par value of stock refers to preferred equity or stockholders. It refers to the value of the stock in correlation to the dividend it provides when issued. If the dividend increases, the market value of the stock is probably above the par value.
Face value in home loans
In the context of home loans, face value refers to the principal of the mortgage, which is the loan amount before you add interest and other costs, such as property tax and homeowners insurance. It’s important to take into account additional costs besides the face value of a loan when calculating what you can afford. When comparing loan estimates don’t focus on the interest rate. Instead, ask for the APR, which includes most of the fees and costs added to a mortgage.
Face value in the real estate market
Face value in the real estate market usually refers to the “listing price” or “asking price” of a property. This is the price printed on paper by the real estate agent when they list properties. So, when you hear your realtor friends talk about how they just sold a property for 10% above the list price or asking price, they mean that they sold the house for 10% above face value.
Although not used as much in the past, face value has become important in the American housing market as it is drastically undersupplied. In a real estate market where demand is significantly outstripping supply, properties often sell fast for above face value. This is because there are multiple bidders when one property hits the market.
Example:
Let’s say you list a property with a face value of $100,000 and have 100 bidders willing to pay that face value. Because of the competition, you can typically negotiate with the bidders to sell the asset for more than the face value you listed it for.
Housing inventory and actual market value
A good way to check if you can sell a property for above or below the face value is to check what the housing inventory in the marketplace is. As a rule of thumb, six months of inventory, or available housing to sell, means that a market is relatively stable, and the asset will trade for close to face value. However, in a market with low and high inventory, the asset will trade for higher or lower in value, respectively.
The graph above explains why U.S. homes sell for way above face value. This is because the inventory has drastically depleted over the past two years or so. With little supply and overwhelming demand, concurrent with population growth, properties everywhere in America are being sold for more than face value.
Key takeaways
- Face value has multiple meanings depending on the context, It is a term given to the asset or security’s value when printed on publicly available paper at the point of issuance.
- Most people have heard the term face value, but it has very specific meanings in the investment world.
- In the bond market, being above or below face value correlates to the interest rate. The higher the interest rate, the lower below par or face value the asset is. The lower the interest rate, the higher it is.
- Although mainly affecting preferred shares, face value is also correlated to interest rates in the stock market through the use of dividends.
- In real estate, the term face value is commonly referred to as the “asking price” or “listing price.” In a market with low inventory, real estate typically sells for above the asking price.
- In the context of home loans, face value can refer to the principal (i.e. initial loan amount) of the mortgage.
- Understanding both the short-term and long-term financial health of a given asset, security, or real estate is paramount to determining true value.
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