Legal Definitions - face value

Face value refers to the nominal or stated monetary worth assigned to a financial instrument, such as a bond or a share of stock, at the time it is issued.

While it can apply to various items, including currency, it is most commonly discussed in the context of securities. For bonds, the face value (also known as par value) is the principal amount that the bondholder will receive back from the issuer when the bond reaches its maturity date. For stocks, particularly common stock, the face value is typically a very small, legally mandated amount per share that a corporation must maintain as capital, often bearing little relation to the stock's market trading price. In the case of preferred stock, the face value can be more significant, often serving as the basis for calculating dividend payments or the liquidation value per share.

• Example 1: Municipal Bonds for a New Park

  A city government decides to fund the construction of a new public park by issuing municipal bonds. Each bond is printed with a face value of $1,000.

  Explanation: This means that when an investor buys one of these bonds, the city promises to repay that investor $1,000 at the bond's maturity date, regardless of whether the investor initially paid more or less than $1,000 for the bond on the open market. The $1,000 face value is the principal amount the city is obligated to return.

• Example 2: Tech Startup's Common Stock

  When a new technology company goes through its initial public offering (IPO), its corporate charter might legally assign a face value of $0.001 per share to its common stock.

  Explanation: This extremely low face value is primarily a legal and accounting formality. It represents the minimum capital per share that the company is legally required to retain. It has almost no bearing on the actual price investors pay for the stock in the market (which could be many dollars per share) or its perceived worth, serving mainly as a historical accounting entry.

• Example 3: Preferred Stock Dividend Calculation

  A utility company issues new preferred stock, stating a face value of $100 per share and an annual dividend rate of 5%.

  Explanation: In this scenario, the $100 face value is crucial because it's the basis for calculating the dividend payment. A 5% dividend rate on a $100 face value means each preferred shareholder will receive $5 per share annually. Additionally, if the company were to liquidate, preferred shareholders would typically be entitled to receive the $100 face value per share before common shareholders receive anything, after creditors are paid.