Definition
The term FACE can have different meanings in different financial and business contexts, including:
-
Face Interest Rate: This is the nominal or stated interest rate of a bond or loan, typically written on the face of the bond certificate. It is the interest rate that the issuer agrees to pay annually or semi-annually on the face value of the instrument.
-
Face Value: This refers to the nominal or dollar value of a security stated by the issuer. For bonds, it is the amount paid to the holder at maturity. For stocks, it is the original cost of the stock shown on the certificate.
Examples
-
Bond Market:
- Face Interest Rate: A bond with a face interest rate of 5% means that the bond will pay interest of 5% annually on its face value.
- Face Value: A bond with a face value of $1,000 will pay the holder $1,000 at maturity.
-
Stock Market:
- Face Value: A share with a face value of $100 means the company originally issued the share at $100.
Frequently Asked Questions (FAQs)
Q1: What is the difference between face value and market value?
- A1: Face value is the nominal value written on the instrument, while market value is the current price at which the instrument is trading in the market.
Q2: Why is the face interest rate important?
- A2: The face interest rate determines how much interest the bondholder will receive periodically and is crucial for comparing the income from different bonds.
Q3: Can the face value of a bond change?
- A3: No, the face value of a bond remains constant throughout the lifetime of the bond until it matures.
Q4: Is face value the same as par value?
- A4: Yes, face value and par value are often used interchangeably, especially in the context of bonds.
Q5: How does the face interest rate differ from the yield?
- A5: The face interest rate is the fixed rate promised by the issuer. The yield is the actual return earned by the investor, which may vary based on market price changes.
Related Terms
- Coupon Rate: The annual interest rate paid by the bond issuer based on the bond’s face value.
- Par Value: Another term for face value, particularly used in the context of stocks and bonds.
- Yield: The earnings generated and realized on an investment over a particular period of time.
Online References
Suggested Books for Further Studies
- Bond Markets, Analysis, and Strategies by Frank J. Fabozzi
- The Basics of Finance: An Introduction to Financial Markets, Business Finance, and Portfolio Management by Pamela Peterson Drake and Frank J. Fabozzi
Fundamentals of FACE: Finance Basics Quiz
### What does the face interest rate refer to?
- [ ] The current market rate of a bond
- [x] The nominal interest rate stated on the bond certificate
- [ ] The interest rate paid after maturity
- [ ] The average interest rate in the market
> **Explanation:** The face interest rate, also known as the coupon rate, refers to the nominal interest rate stated on the bond certificate. It is the rate that the bond issuer agrees to pay to the bondholder.
### Does the face value of a bond change over time?
- [ ] Yes, it fluctuates based on market conditions.
- [ ] Yes, it changes with inflation.
- [x] No, it remains constant until maturity.
- [ ] No, it changes based on the issuer's financial performance.
> **Explanation:** The face value of a bond remains constant over its lifetime and is the amount paid to the bondholder at maturity.
### Is the face value of a bond the same as its market value?
- [ ] Yes, they are always the same.
- [ ] Yes, except during rare circumstances.
- [x] No, face value is the nominal value, while market value varies.
- [ ] No, face value is always higher than market value.
> **Explanation:** The face value of a bond is the nominal value written on the bond, while the market value is the price at which the bond is currently trading in the market.
### What is another common term for face value in the context of bonds?
- [x] Par value
- [ ] Book value
- [ ] Intrinsic value
- [ ] Market value
> **Explanation:** Face value is also commonly referred to as par value, especially in the context of bonds.
### How often is the face interest rate paid?
- [ ] Annually
- [ ] Monthly
- [x] Annually or semi-annually
- [ ] Daily
> **Explanation:** The face interest rate, or coupon rate, is typically paid either annually or semi-annually depending on the terms of the bond.
### Why is the face value important to bondholders?
- [ ] It determines the market value of the bond.
- [ ] It identifies the selling price of the bond.
- [x] It is the amount paid at maturity.
- [ ] It changes the yield of the bond.
> **Explanation:** The face value is important to bondholders because it is the amount they will receive when the bond matures.
### What does a bond's face interest rate determine?
- [ ] The profit the issuer makes
- [x] The periodic interest payment received by bondholders
- [ ] The maturity date of the bond
- [ ] The principal repayment schedule
> **Explanation:** The face interest rate determines the periodic interest payments that bondholders receive.
### Can the face interest rate on a bond be changed by the issuer?
- [x] No, it is fixed at issuance and remains unchanged.
- [ ] Yes, it can be adjusted annually.
- [ ] Yes, it changes with inflation.
- [ ] Yes, based on the issuer's performance.
> **Explanation:** The face interest rate is fixed at the issuance of the bond and remains unchanged throughout its life.
### What happens to the face value of a bond at maturity?
- [ ] It depreciates and loses value.
- [ ] It is converted into equity.
- [x] It is paid back to the bondholder.
- [ ] It is automatically reinvested.
> **Explanation:** At maturity, the face value of the bond is paid back to the bondholder.
### Does the face value contribute to calculating the bond’s interest payout?
- [x] Yes, the interest payout is calculated on the face value.
- [ ] No, it is calculated on the bond's market value.
- [ ] No, it is calculated on the issuer's revenue.
- [ ] No, the payout is fixed regardless of the face value.
> **Explanation:** The interest payout, as determined by the face interest rate, is calculated based on the bond's face value.
Thank you for exploring the detailed concepts of FACE and tackling the quiz questions. Keep pushing forward in your financial education journey!
