A bond is a fixed rate financial instrument i.e. the bondholder receives a fixed rate of interest. But the yield on a bond fluctuates with the market price. Face value of a bond refers to the original price of the bond when it is first issued. It is the amount that the bondholder will receive upon maturity. Face value of a bond is also known as the principal or par value.
Face Value of a Bond vs Price of Bond
The concepts that revolve around the price and yield of bonds can easily baffle the investors. A number of times, people get confused between the face value and the price of the bond. These are not the same! The price of the bond fluctuates with the changes in a number of variables. If the price of a bond rises above its face value, it is known to be selling at premium. Whereas, if the same falls below the face value, a bond is said to be selling at discount.
Face value plays a major role in various calculations related to bonds such as market value, interest payments, yields, premiums and discounts. The price of the bonds is heavily influenced by the face value. Based on the financial health of the issuer and the changes in the rate of interest, the price of the bond can either fall below its face value or rise above it.