What Is the Face Value of a Bond?
Bonds are debt instruments issued by governments and corporations. The three key components of a bond are interest rate, maturity and face value. The face value is the contractual amount that is to be repaid at maturity. Most bonds are issued in $1,000 denominations, with $1,000 being the face value. Face value, or par, is important, because it is used to calculate or express other bond values and parameters.
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Interest Rate
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The annual interest rate a bond pays is expressed as a percentage of par, or face value, at issuance. For example, an 8 percent bond will pay 8 percent interest, or $80, for each $1,000 of face value. This "official," or nominal, interest rate is called the coupon rate. However, once the bond is issued, the payment is set in dollars, in this case $80, and does not change.
Maturity
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At maturity, the bond investor is to be repaid the full face value, regardless of how much he paid for the bond.
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Pricing
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Once issued, bonds can trade in the secondary market for more or less than the face value--at a premium or at a discount. Bonds are priced as a percentage of par, or face value. A price of 100 means 100 percent of the $1,000 face value, or $1,000. A price of 97.3 means $973 for each $1,000 of face value.
Denominations
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When an investor says that he wants to buy five bonds, he means five $1,000 face value bonds, or $5,000 worth of a particular bond. If the price of the bond is 97.3, he will end up paying $4,865 for $5,000 face value bonds. At maturity, he will get back $5,000 and realize a $135 capital gain on his investment, in addition to the annual interest he will have received.
Yield
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The confusing part is the current yield vs. the coupon rate. The investor will collect $80 in interest annually, which on a $1,000 face value amounts to 8 percent--the "official" coupon rate. But if he paid $973 per $1,000, his annual yield, or return on his investment, would be $80 divided by $973, which is 8.2 percent.
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