key term - Face Value

Definition

Face value refers to the nominal or printed value of a financial instrument, such as a bond or stock certificate, without consideration of any premium or discount. It represents the amount that will be paid to the holder at maturity or upon redemption.

5 Must Know Facts For Your Next Test

1. Face value is the value printed on the bond, stock certificate, or other financial instrument, and it represents the amount the issuer promises to pay the holder at maturity or upon redemption.
2. The face value of a bond is the amount the issuer will pay the bondholder when the bond matures, regardless of the bond's market price.
3. The face value of a stock is the original value assigned to the stock by the issuing company, which is typically a small, nominal amount.
4. Face value is used to calculate the interest payments on bonds, as the interest rate is applied to the face value to determine the periodic interest payments.
5. The difference between the face value and the market price of a security is known as the discount or premium, which reflects the security's perceived value in the market.

Review Questions

• Explain the significance of face value in the context of how households supply financial capital.
  • Face value is an important concept in how households supply financial capital because it represents the nominal or stated value of the financial instruments, such as bonds and stocks, that households may invest in. The face value is the amount the issuer promises to pay the holder at maturity or upon redemption, and it is used to calculate the interest payments on bonds. Households consider the face value of financial instruments when making investment decisions, as it helps them understand the potential returns and risks associated with their investments.
• Describe how the relationship between face value and market price affects household investment decisions.
  • The relationship between the face value and market price of a financial instrument can significantly impact household investment decisions. If the market price is lower than the face value, the security is trading at a discount, which may present an opportunity for households to purchase the instrument at a lower cost. Conversely, if the market price is higher than the face value, the security is trading at a premium, which may make it less attractive to households seeking higher returns. Households must carefully consider the face value, market price, and the factors influencing the difference between the two when evaluating potential investments to align with their financial goals and risk tolerance.
• Analyze how changes in face value can affect the overall supply of financial capital from households.
  • Changes in the face value of financial instruments can impact the overall supply of financial capital from households. If the face value of bonds or stocks increases, it may attract more households to invest in these instruments, as the potential returns may be perceived as more favorable. Conversely, a decrease in face value may discourage households from supplying financial capital, as the perceived risk-reward ratio may become less appealing. Additionally, changes in face value can influence the liquidity and marketability of financial instruments, which are important considerations for households when allocating their financial resources. The relationship between face value and the supply of household financial capital is complex and depends on various economic factors, investor sentiment, and the specific needs and risk profiles of individual households.

Related terms

Par Value: The nominal or stated value of a bond or stock, which is the amount the issuer promises to pay the holder at maturity or upon redemption.

Discount: The amount by which the market price of a security is less than its face value or par value.

Premium:

The amount by which the market price of a security exceeds its face value or par value.