What Is the Face Value of a Bond and How It Differs From Market Value

Bonds are a type of debt security used by government entities and corporations to raise money. Every bond comes with a face value, which is sometimes called a par value. This number indicates what the bond will be worth at maturity, and it’s also used to calculate the bond’s interest payments. It’s one of the key numbers you need to know about a bond to understand its value as an investment.

If you have specific questions about investing in bonds, consider consulting with a financial advisor.

What Is the Face Value of a Bond?

A bond’s face value refers to how much a bond will be worth on its maturity date. In other words, it’s the value that the bondholder will receive when their investment fully matures (assuming that the issuer doesn’t call the bond or default). Most bonds are issued in $1,000 denominations, so typically the face value of a bond will be just that – $1,000. You might also see bonds with face values of $100, $5,000 and $10,000.

The price you pay for a bond may be different from its face value and will change over the life of the bond, depending on factors like the bond’s time to maturity and the interest rate environment. But the face value does not change. If it was $1,000 at issue, then that’s exactly what the holder of the bond will receive when it matures at the end of its term.

Understanding How Bonds Work

What Is the Face Value of a Bond and How It Differs From Market Value

In simple terms, a bond is a loan between an investor and an issuer. They are common investment securities issued by government organizations or businesses in an effort to drive capital for an upcoming project or initiative.

Bonds have a set term; usually, a bond’s term ranges from one to 30 years. Within this time frame, there are short-term bonds (1-3 years), medium-term bonds (4-10 years) and long-term bonds (10 years or more). The end of this term is known as the maturity date. At this point, the full face value of the bond is paid to investors.

However, the face value is not the only return a bondholder will receive. You’ll also receive interest payments, which are likewise established at the outset. A bond’s coupon rate is the rate at which it earns these returns, and payments are based on the face value. So if a bond holds a $1,000 face value with a 5% coupon rate, then that would leave you with $50 in returns annually. This is in addition to the issuer paying you back the bond’s face value on its maturity date.

Bonds are generally considered safer investments than equity investments (stocks). But as with any investment, nothing is a sure bet. Bond investors need to worry about default risk – that the issuing government or corporation will go bankrupt and default on its loan obligations. They also need to worry about interest rate risk – that a change in prevailing interest rates will lower the value of your bond.

Also, check to see if your bond paperwork includes language on whether or not it’s “callable.” In this situation, holders of a called bond will receive repayment earlier than anticipated before the maturity date. If you’d rather avoid investing in individual bonds, there are many mutual funds and exchange-traded funds that focus on fixed-income investments.

How to Calculate the Value of a Bond

Determining the value of a bond is a crucial skill for investors looking to diversify their portfolios with fixed-income securities. At its core, bond valuation involves calculating the present value of a bond’s future interest payments, known as coupon payments and its face value, which is the amount paid back to the bondholder at maturity. This process helps investors assess whether a bond is priced fairly in the market and aligns with their investment goals.

Interest rates play a significant role in bond valuation. When interest rates rise, the value of existing bonds typically falls, and vice versa. This inverse relationship occurs because new bonds are issued with higher yields, making older bonds with lower yields less attractive. Investors must consider current and projected interest rates when evaluating a bond’s potential return, as these rates directly impact the bond’s market price.

To determine a bond’s value, investors calculate the present value of its expected cash flows. This involves discounting future coupon payments and the bond’s face value back to its present value using a discount rate, often the current market interest rate. The sum of these present values gives the bond’s theoretical market price. This calculation helps investors decide if a bond is a worthwhile investment compared to other opportunities.

Face Value vs. Market Value Price

A bond’s face value differs from its market value. Face value is the amount of money promised to the bondholder upon the bond’s maturity. Market value is influenced by real-time supply and demand, interest rate movements and the issuer’s credit outlook. As these forces shift, the price investors are willing to pay for the same bond can rise above or fall below its original face value.

When a bond trades for more than its face value, it’s said to be selling at a premium. This usually happens when prevailing interest rates fall and the bond’s fixed coupon payments become more attractive relative to newer, lower-yielding issues. Conversely, a bond sells at a discount when its market price drops below face value, often because interest rates have climbed or investors perceive greater risk.

The relationship between face value and market value becomes clearer when you consider yield, the effective return an investor earns based on the bond’s current price. When a bond’s price rises, its yield falls; when its price drops, its yield increases. This inverse relationship helps investors compare bonds with different prices and coupon rates and decide whether a premium or discount still offers a compelling return.

Face Value vs. Par Value

Face value and par value are typically used interchangeably when discussing bonds, and both refer to the amount the issuer promises to repay at maturity. For most traditional bonds, this number is set when the bond is issued and usually equals $1,000 per bond. Investors rely on this fixed amount to know exactly what they’ll receive at the end of the bond’s term.

Although the terms overlap, par value is technically the price at which a bond is originally issued, while face value represents the amount printed on the bond certificate. In most cases those numbers match, but exceptions can arise with certain structured products or corporate securities. Understanding these nuances can help investors recognize what’s guaranteed and what may change once a bond begins trading.

Bottom Line

Combined with other factors like the coupon rate and time to maturity, an investor can determine how much money a bond will ultimately generate and its value relative to other bonds on the market. Aside from knowing your bond’s face value, be sure you’re well-versed in its coupon dates. These are the all-important days when you’ll receive interest payments. While frequency can vary from bond to bond, they’re usually annual or semi-annual. There are also zero-coupon bonds, which means that the bond issuer pays no interest on the bond’s face value.

Tips for Investing

Bonds will play an important role in your portfolio as you get closer to retirement, so it’s essential to work with a financial advisor who can help you navigate the world of fixed-income investing. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
One of the main benefits of using a financial advisor is that they can help you build a diversified portfolio. This is typically done through the creation of the right asset allocation, which accounts for your risk tolerance and time horizon to allocate your portfolio to stocks, bonds and other asset classes.
Even if investing is the main reason you want a financial advisor, it might be worth taking advantage of their financial planning offerings. While not all firms have these services, most do, and they can help you go beyond investment management to take a more holistic view of your financial situation.