Face value is a financial concept representing the nominal value of a financial instrument, used for pricing and valuation.
Face Value Definition
Face value is the original amount stated on a financial instrument, like a Rs 100 note. It has particular implications for stocks and bonds.
Face Value in Different Financial Instruments
Stocks: Face value is assigned to a share at issuance and is used in accounting, but it doesn't significantly affect stock valuation.
Bonds: Face value is the amount repaid at maturity and influences bond valuation and investment choices.
Other Instruments: Face value is applicable to other financial instruments, like options contracts and certificates of deposit (CDs).
Face Value in Investment Decisions
Face value is relevant in assessing investment opportunities:
Pricing and Valuation: Face value is used for pricing and valuation of fixed-income securities like bonds.
Intrinsic Value Assessment: Face value can help determine a company's shares' intrinsic value. However, stock market prices are influenced by other factors too.
Investment Comparison: Face value can be used to compare investment alternatives with similar nominal values.
Face value vs Market Value
Face value is the original value, while market value is the current buy/sell price. Market value can be higher (premium) or lower (discount) than face value.
Face value is a reference point for pricing and valuation. It affects fixed-income securities like bonds more than stocks. It should be considered alongside other factors in investment decisions.