The amount that is written on the face of a financial instrument is called its par value. It is the principal amount that the investor is paying to the issuer. It is also known as ‘face value’
Par Value in terms of returns
- Dividend is paid on the face value of equity shares. There is no relationship between this value and market price. Thus, an investor may pay Rs.1,000/- for an equity share having face value of Rs.100/-. If dividend is declared at 10%, the quantum of dividend will be Rs.10/- (calculated at 10% of Rs.100);
- Interest on bonds is also paid on their face value. But there is an intrinsic relationship between the interest rate and the price of the bond in the secondary market;
- When interest rates in the market are higher than the bond interest rate, the bond will be priced at a discount. This is because the discounted bond price increases the effective rate of interest (which is calculated with reference to the par value) making it attractive to the prospective purchaser;
- Conversely, when market interest rates are lower than the bond interest rate, the bond will be priced at a premium. Purchasers are willing to pay a premium to derive the benefit of the higher interest rate (though it will be computed on the par value);
I find it easier to refer to this as face-value because par-value doesn’t engage my mnemonic devices. Par value doesn’t make sense… it just makes me think of golf
However, when considering shares and the stockmarket, The term “face value” doesn’t really make sense at all. No wonder there are so many terms for the same type of idea.