Face Value
Face value refers to the price of shares, bonds, promissory notes, banknotes or coins determined by the issuer. As a rule, it is depicted directly on the security or on the coin. The face value of a share is usually defined as the amount of money that reflects the share of the authorized capital of the issuer that falls on this share. It is displayed on the certificate. The face value of a bond represents the amount that must be repaid to an investor at maturity. It is also called par or nominal value.
Face Value explained
In bond investing, nominal value is defined as the amount that the issuer will pay when the bond matures, only if there is no bond default. Nevertheless, the bonds can then trade in the secondary market above or below par, depending on interest rate. For instance, when the market interest rate exceeds the bond's coupon rate, then it is trading for less than its nominal value.
When selling a bond, an investor may receive the full principal and the interest that has accumulated. In some cases, he may get profit from the difference between the original face value and the par value when the bond becomes due.
The nominal value of a share multiplied by the number of all issued shares is equal to the amount of the authorized capital of the organization. When the stock is sold to first investors, it is often sold at face value. Then, the price of the security goes up or down. The higher the company's profit, the higher the return on shares (shareholders' dividends) is. Basically, the funds that support the nominal value act as a form of default reserve.
According to the U.S. law, companies have the authority to set and change the face value of their securities. This enables them to set lower values to set aside funds for unexpected expenses or losses. For instance, Apple Inc., American manufacturer of PC, smartphones and other electronics, set its face value at $0.00001.
Market value
The par value of a security does not always coincide with the market value. The market value is the value at which shares are sold and bought in the free market. Significant changes in the market value —either up or down— are the result of a number of factors, including supply and demand. Fluctuations in supply and demand do not affect the par value.
When a company's shares start trading on the market, their market price is a little higher than the nominal one. Then, when investors start to make investments in new assets, the market price begins to grow rapidly. Sometimes it becomes far higher than the nominal one. The further decrease in demand causes a decline in market value, but it still remains higher than the par if the organization is doing well. The market price may fall below the original value if there are tough times in business.
Due to the fact that the face value is determined at the time of issue of the bond, the price at which an asset may be sold in the open market may fluctuate depending on interest rates and it is almost never equal to face value.
A zero-coupon bond is a financial instrument on which no interest is paid, but which is sold at a deep discount from the original value. The bondholder receives income due to a gradual increase in its value up to the nominal value as the maturity approaches.
