Face Value: Definition in Finance, Comparison With Market Value

What Is Face Value?

Face value is a financial term used to describe a security's nominal or dollar value as given by its issuer. For bonds, it's the amount paid to the holder at maturity. The face value of bonds is often called "par value" or simply "par."

For stocks, the face value is the stock's original cost, as listed on the certificate. In reality, the par value of a stock is unimportant. It can be set at a low, arbitrary amount, especially in countries like the U.S. Many U.S. companies deliberately issue stocks with very low par values due to specific state regulations. These rules tie the cost of incorporating a company to the par value of the registered shares. By assigning low par values to their stocks, companies can decrease their incorporation fees.

Below, we review what else you need to know about par or face value.

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 a guaranteed return, the face value of a stock is not an indicator of its 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 sum face value of the entirety of a company’s shares establishes the legal capital a corporation is obligated to maintain. Only the above-and-beyond capital may be released to investors through 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 gives companies the leeway to use very low values to determine the size of the reserve. For example, the par value of AT&T Inc. (T) shares is listed as $1 per common share, while shares of Apple Inc. (AAPL) have a par value of $0.00001.

Face Value vs. Market Value

The face value of a stock or bond does not equal its actual market value. Market value is determined based on principles of supply and demand, which are governed by the dollar figure where investors are willing to buy and sell the security at a given time. 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 about bonds. Face value differs from market value, which is the security price based on supply and demand. With bonds, face value refers to the amount paid to the bondholder at maturity—although, as with stocks, bond market prices can fluctuate if sold on the secondary market.

Historically, face value ensured companies didn't sell stocks below a specific price. As a data point in a time of limited information, face value also protected shareholders. For issuers, face value created a value expectation when shares were sold.