To raise funds, governments and corporate companies make use of the concept of bonds. Face value is the value of the bond when it matures. Face value is otherwise called par value, and it is used in calculating the interests. The face value signifies the with and value of a bond that determines if the investor will invest.
Bond Price vs Face Value
The main difference between Bond Price and Face Value is that face value is the value that the bond has at the time of maturity, whereas bond price is the current worth of the bond calculated by considering the discount values. By deducting the future cash, one can calculate the bond price.
Bond price is the current worth or value of the bond that is computed by discounting the value of future cash flow. The price of a bond varies inversely with the change in interest rate. The issuer of the bond sometimes may not be able to repay the loan and compensate that the price of the bond is linked with the credit of the buyer.
Face value is, however, different from the price of the bond. The amount that the bondholder will receive on the maturity of their bond is known as the face value. The rate of interest and the time of maturity are some of the factors that influence the face value. The face value is fixed at the time of investment.
Comparison Table Between Bond Price and Face Value
| 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 usually remains constant throughout. |
| Relationship with the Bond | The bond’s details arent usually specified based on its bond price since it fluctuates. | Bond is described based on its face value. |
| Factors | Factors that impact the price of the bond are the credits given by the issuer of the bond, interests, and the time period of maturity. | Time and rate of interest are the major factors that determine the face value. |
| Public’s view | Bond price may or may not be affected by the public’s impression of the organization. | The face value does not get impacted by public opinion. |
| Pre-determined or not | Bond price varies with respect to 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. Yield to maturity and bond price are inversely proportional. When the value of the coupon rate is lesser than the yield to maturity, the face value is greater than the value of the bond price. In order 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 time of issue.
Though initially, they are issued at a price as the same as the face value, with time, the bond price deviates from the face value. With a fall in the interest rate, the bond prices increase and vice versa. Bond prices are impacted by features like the coupon rates, par value, time of maturity in addition to the yield to maturity.
The time of maturity is calculated either annually, twice in a year, or thrice in a year. Based on the number of intervals, there are coupons. 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 result in an increased 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 value of the face value remains constant. Though the face value remains unchanged, there are a few factors that influence the face value.
They are credits, rate of interest, and maturity time. Higher values of yield result in a fall in bond price. There are few companies that rate the bonds, and the credit rating that they provide to the bond plays a major role in the rise or fall of the face value. Face value is the pre-determined and fixed reserve.
The issuer of the bond owns the responsibility of initializing the face value of the bond. 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 they are completely different from one another. The profit received by the investor from the bond is based on the fluctuations in the original price at which the bond is issued. Inflation rates are an exceptional factor that deviates and changes the face value.
Main Differences Between Bond Price and Face Value
- Bond price changes with time, whereas face value almost remains constant.
- 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 on the organization.
- Bond price is neither fixed nor pre-determined, whereas face value is fixed beforehand.
Conclusion
Bonds are analogous to loans that help the bigger organizations and also sometimes the government to raise funds. Bonds are very good sources of fixed income when compared with stocks, commodities, and cash. Knowing the bonds the right way and working properly with the knowledge of these terminologies might profit us and provide us with constant and beneficial interests.
They also proved an appreciable profit when they are resold. However, like anything else, they also have a few drawbacks. When the time of maturity increases, the buyer of the bond will receive very little return on investment that might lead to a loss.
References
- https://www.sciencedirect.com/science/article/pii/B9780444594068000135
- https://www.aeaweb.org/articles?id=10.1257/aer.101.4.1497