To raise funds, governments and corporate companies use the concept of bonds. Face value is the value of the bond when it matures. Face value, or par value, is used to calculate the interests.
Key Takeaways
- The face value of a bond is the amount the bond will be worth at maturity, while the bond price is the bond’s current market value.
- The bond price can be higher or lower than the face value, depending on interest rates, creditworthiness, and market demand.
- Investors can buy bonds at their face value or a premium or discount to the face value, and the bond price will fluctuate over time.
Bond Price vs Face Value
Bond price refers to the amount an investor pays to purchase a bond. It can fluctuate based on the bond issuer’s interest rate and credit rating. Face value refers to the amount a bond will be worth when it matures, also known as the “par value.” It is the amount the bond issuer promises to pay the bondholder at maturity.
Bond price is the bond’s current worth or value computed by discounting the value of future cash flow. The price of a bond varies inversely with the change in interest rate.
The bond issuer sometimes may be unable to repay the loan and compensate that the bond price is linked with the buyer’s credit.
Face value is, however, different from the price of the bond. The amount the bondholder will receive on the maturity of their bond is known as the face value.
The rate of interest and the maturity time are some factors that influence the face value. The face value is fixed at the time of investment.
Comparison Table
| Parameters of Comparison | Bond price | Face value |
|---|---|---|
| Change in value | Though the face value is assigned to the bond price, initially during the time of issue, it slowly changes with time. | The face value remains constant throughout. |
| Relationship with the Bond | The bond’s details aren’t specified based on its price since it fluctuates. | A bond is described based on its face value. |
| Factors | Factors that impact the bond’s price are the credits given by the bond issuer, interests, and maturity period. | Time and interest rate are significant factors that determine the face value. |
| Public’s view | The public’s impression of the organization may or may not affect the bond price. | The face value does not get impacted by public opinion. |
| Pre-determined or not | Bond price varies concerning so many factors, and it is not pre-determined. | Face value is fixed, and it is pre-determined. |
What is Bond Price?
The bond price is dependent on a factor called yield to maturity. When the value of the coupon rate is lesser than the yield to maturity, the face value is greater than the bond price value.
To sell them at a price much closer to their face values, the bond price is fixed as a value, as same as the coupon rates during the issue.
Though initially, they are issued at a price the same as the face value, the bond price deviates with time.
With a fall in the interest rate, the bond prices increase and vice versa. Bond prices are impacted by features like coupon rates, par value, and time of maturity, in addition to yield to maturity.
The time of maturity is calculated either annually, twice a year, or thrice a year. The number of coupons is as same as the number of intervals. When the coupon rate is higher, the bond price is also higher. Similarly, the increase in par value will increase the bond price.
What is Face Value?
Face value is equal to the bond price at the time of issue, whereas in the future, with time, the value varies. Based on the time and interest rates, though the bond price undergoes fluctuations, the face value remains constant.
They are credits, rate of interest, and maturity time. Higher values of yield result in a fall in bond price. Few companies rate the bonds, and the credit rating they provide to the adhesive plays a significant role in the rise or fall of the face value.
The bond issuer is responsible for initializing the bond’s face value. Upon reaching maturity, the pre-decided value is issued to the person who owns the bond, that is, to the investor.
The face value does not correspond to the market value and is entirely different. The profit the investor receives from the bond is based on the fluctuations in the original price at which the bond is issued.
Main Differences Between Bond Price and Face Value
- Bond price changes with time, whereas face value almost remains constant.
- A bond is expressed in terms of face value but not with the bond price.
- Bond price also depends on the credits in addition to time and interest, whereas time and interest only affect face values but not credits.
- The bond price depends on the public’s opinion and the reviews of the organization.
- Bond price is neither fixed nor pre-determined, whereas face value is fixed beforehand.
- https://www.sciencedirect.com/science/article/pii/B9780444594068000135
- https://www.aeaweb.org/articles?id=10.1257/aer.101.4.1497
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