Face Value

Definition

Face Value is the dollar amount specified by a financial document, such as a mortgage, bond, or stock. It is a fixed value that does not change regardless of the market conditions. The face value is used to determine the actual payout for a bond at its maturity, the denomination of stocks, or the principal amount on a mortgage.

Examples

Bonds: The face value of a bond, also known as its par value, is generally $1,000. This is the amount that will be repaid to the bondholder at maturity, irrespective of the bond’s trading price in the secondary market.
Stocks: In the context of stocks, the face value is the original cost of the stock, as stated on the certificate. For example, if a stock certificate lists a value of $50, that is the stock’s face value.
Mortgages: A mortgage has a face value of $300,000, meaning that this is the principal amount the borrower agrees to repay, not accounting for interest or changes in market value.

Frequently Asked Questions

What is the difference between face value and market value?

Face Value is the amount shown on the financial document, while Market Value reflects the current worth or price in the open market, which can fluctuate.

Is face value important for bonds?

Yes, the face value determines the cash payout when the bond reaches maturity and helps calculate interest payments.

Does face value of a stock affect its market value?

Generally, no. The market value of a stock is influenced by trading activity and investor perception, while the face value remains unchanged.

In real estate, can the face value of a property change?

No, the face value of financial assets connected to real estate, such as mortgages, remains constant. It is the agreed principal amount between the borrower and lender.

Amortization schedules are based on the face value of a mortgage, outlining how principal amounts, expressed in terms of face value, will be paid down over time.

Market Value The price at which an asset would trade in a competitive auction setting.

Amortization The process of paying off a debt over time through regular payments of principal and interest.

Principal The original sum of money borrowed in a loan or the initial investment amount in a bond, excluding interest.

Interest Rate The percentage of a loan or mortgage charged as interest to the borrower, typically expressed annually.

Par Value Another term for face value, often used in the context of bonds and preferred stock, representing the stated amount to be paid back at maturity.

Online Resources

References

“Investing For Dummies” by Eric Tyson
“The Intelligent Investor” by Benjamin Graham
“Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen

Suggested Books for Further Studies

“Investment Management: Theory and Practice” by Charles Parker Jones
“The Real Estate Investment Handbook” by David F. Boczar and Claude G. Lancelle
“Real Estate Finance & Investments” by William Bruggeman and Jeffrey Fisher

Real Estate Basics: Face Value Fundamentals Quiz

### What does the face value of a financial instrument represent? - [x] The fixed nominal amount stated on the document. - [ ] The current trading price in the market. - [ ] The initial investment with accrued interest. - [ ] The estimated future value considering inflation. > **Explanation:** The face value represents the fixed nominal amount stated on a financial document or instrument. ### How does face value differ from market value? - [ ] Face value often changes with market conditions. - [ ] They are the same in financial contexts. - [x] Face value is fixed, while market value fluctuates. - [ ] Face value is used to calculate profits directly. > **Explanation:** Face value is a fixed nominal amount, while market value is subject to fluctuations based on market conditions. ### For bonds, what is the significance of the face value? - [ ] It determines the interest payments. - [x] It is the amount repaid at maturity. - [ ] It changes with market interest rates. - [ ] It represents potential gains. > **Explanation:** The face value of a bond is important because it is the amount that will be repaid at maturity. ### Can the face value of a mortgage change over time? - [ ] Yes, it depends on the interest rate fluctuations. - [x] No, it remains constant as it is the principal amount. - [ ] Yes, if agreed upon by the lender and borrower. - [ ] It's adjusted periodically for economic factors. > **Explanation:** The face value of a mortgage remains constant as it represents the principal amount agreed upon initially. ### What impact does face value have on stock prices? - [ ] It directly influences the trading price in the market. - [x] It usually doesn't affect stock prices. - [ ] It ensures a minimum trading price. - [ ] It determines dividend payouts. > **Explanation:** The face value of a stock generally does not affect its market-driven trading price. ### What is another term commonly used to refer to face value? - [ ] Market value - [x] Par value - [ ] Nominal interest - [ ] Amortized value > **Explanation:** "Par value" is a term often used interchangeably with "face value," especially in the context of bonds and preferred stocks. ### In an amortization schedule, to which aspect is face value crucial? - [x] Principal repayment plans - [ ] Interest rate adjustments - [ ] Market value benchmarks - [ ] Tax calculations > **Explanation:** In an amortization schedule, face value is crucial as it outlines the principal amounts to be repaid over time. ### Are interest rates applied to the face value in bonds? - [x] Yes, interest payments are based on face value. - [ ] No, they are based on the market price. - [ ] Sometimes, depending on bond maturity. - [ ] Only when bonds are sold in the open market. > **Explanation:** Interest payments on bonds are typically calculated based on the bond's face value. ### Why might the face value of a stock be different from its market value? - [ ] Market value always follows the face value. - [ ] Face value adjusts with new stock issues. - [x] Market prices are influenced by supply, demand and investor perception. - [ ] Face value is recalibrated periodically. > **Explanation:** Market value of a stock fluctuates due to supply and demand, while face value remains constant. ### Which financial document commonly shows face value prominently? - [ ] Everyday bank checks - [x] Bonds and stock certificates - [ ] Personal loan contracts - [ ] Insurance policies > **Explanation:** Face value is typically prominently shown on bonds and stock certificates, indicating the nominal or par value.