Definition
Face Amount, also known as Face Value, is the nominal or dollar value assigned to a financial instrument or security by its issuer. In the context of bonds, the face amount represents the principal or par value, which the bond issuer agrees to repay the bondholder at maturity. For life insurance policies, the face amount is the death benefit, representing the sum paid to the beneficiaries upon the policyholder’s death.
Examples
-
Bonds:
- If a bond has a face amount of $1,000, this is the principal amount that will be returned to the bondholder when the bond matures.
-
Life Insurance:
- A life insurance policy with a face amount of $500,000 means that if the insured person dies, the designated beneficiaries will receive a payment of $500,000.
Frequently Asked Questions
Q1: Is the face amount the same as the market value?
- A1: No, the face amount differs from the market value, which can fluctuate over time due to various factors such as interest rates and market conditions.
Q2: Do all bonds have the same face amount?
- A2: No, face amounts can vary depending on the bond issuer and the bond type. The most common face amounts are $1,000 and $10,000, but they can be different.
Q3: How is the face amount different from the death benefit in a life insurance policy?
- A3: The face amount in a life insurance policy typically represents the base death benefit, but the total death benefit received by beneficiaries could be higher if additional riders or benefits are included.
Related Terms
- Par Value:
- Definition: The face value of a bond or stock as stated by the issuer.
- Maturity:
- Definition: The specific date when the principal amount of a bond or other debt instrument is due to be paid back to the bondholder.
- Beneficiary:
- Definition: The person or entity entitled to receive the death benefit from a life insurance policy upon the death of the insured.
- Death Benefit:
- Definition: The amount paid to beneficiaries upon the death of the policyholder, which can include the face amount plus any additional coverage.
Online Resources
- Investopedia: Face Value
- Securities and Exchange Commission: Bond Basics
- Internal Revenue Service: Life Insurance and Annuities
References
- Fabozzi, Frank J. “Bond Markets: Analysis and Strategies.” Pearson Education, 2012.
- Rejda, George E., and McNamara, Michael J. “Principles of Risk Management and Insurance.” Pearson, 2017.
Suggested Books for Further Studies
- “The Bond Book” by Annette Thau
- “Risk Management and Insurance” by Scott Harrington and Gregory Niehaus
- “Investing in Bonds For Dummies” by Russell Wild
Real Estate Basics: Face Amount Fundamentals Quiz
### Is the face amount the value at which a bond is issued?
- [x] Yes, it is the value or principal amount to be repaid at maturity.
- [ ] No, it is the current market price.
- [ ] It is the coupon rate.
- [ ] It is determined by current interest rates.
> **Explanation:** The face amount or face value is the principal amount that the bond issuer agrees to repay the bondholder at maturity, not the market price or the coupon rate.
### What happens to the face amount of a bond at its maturity?
- [x] It is repaid to the bondholder.
- [ ] It accrues interest.
- [ ] It changes based on inflation.
- [ ] It is reinvested into another bond.
> **Explanation:** At maturity, the face amount of a bond is repaid to the bondholder. This is the principal amount specified by the bond's terms.
### How does the face amount impact life insurance policies?
- [x] It determines the death benefit payable.
- [ ] It is the policy's premium.
- [ ] It dictates loan terms against the policy.
- [ ] It affects the policy's cash surrender value.
> **Explanation:** In life insurance, the face amount is the specified amount payable to beneficiaries upon the death of the insured, also referred to as the death benefit.
### Is the face amount of a bond the same as its selling price?
- [ ] Always
- [ ] Never
- [x] Sometimes
- [ ] Only during initial offering
> **Explanation:** The face amount and selling price can be the same at issuance, but later they may differ due to market conditions and interest rate changes.
### What does the face amount signify in a zero-coupon bond?
- [ ] The periodic interest payments
- [ ] The money received throughout its term
- [x] The amount received at maturity
- [ ] The bond's tax implications
> **Explanation:** In a zero-coupon bond, the face amount signifies the amount the bondholder will receive at maturity, since such bonds do not make periodic interest payments.
### Can market value exceed the face amount?
- [x] Yes, depending on interest rates and market conditions.
- [ ] No, the face amount is always greater.
- [ ] Only if coupons are included.
- [ ] It depends on the issuer.
> **Explanation:** Market value can indeed exceed the face amount if interest rates have declined since the bond was issued, making the bond's fixed interest payments more attractive.
### How does additional coverage impact the face amount of a life insurance policy?
- [ ] It decreases the face amount.
- [x] It can increase the total death benefit.
- [ ] It has no impact.
- [ ] It reduces the policy's tenure.
> **Explanation:** Additional coverage or riders can increase the total death benefit received by beneficiaries, but the face amount is the original base amount.
### Are face value and par value interchangeable terms for bonds?
- [x] Yes, both refer to the principal amount.
- [ ] No, par value and face value differ.
- [ ] Only in zero-coupon bonds.
- [ ] They are different in high-yield bonds.
> **Explanation:** Face value and par value are interchangeable terms when referring to the principal amount of a bond that needs to be repaid at maturity.
### Is face amount a factor in determining periodic interest payments?
- [x] Yes, it's the basis for coupon payment calculations.
- [ ] No, it only affects maturity value.
- [ ] Only in variable interest bonds.
- [ ] It's determined by the issuer solely.
> **Explanation:** Periodic interest payments (coupons) are calculated based on the face amount or par value of the bond.
### Does the face amount of life insurance affect premium amounts?
- [x] Yes, higher face amounts generally lead to higher premiums.
- [ ] No, premiums are fixed regardless of the face amount.
- [ ] Only for term life insurance.
- [ ] It solely affects the cash value.
> **Explanation:** The face amount typically affects the premium amounts in life insurance policies, with higher face amounts leading to higher premiums.
