What is the face value of a bond? Is it the same as the purchase price?

QnA Discussions
1

I am a bit confused about face value. On BondScanner it shows a face value of Rs 1,000 for most bonds. But the price I pay to buy it is sometimes different. Why would I pay Rs 950 or Rs 1,020 for a bond that has a face value of Rs 1,000? And what exactly is face value?

2

This is a really important concept to get clear.

Face value (also called par value) is the amount the issuer promises to repay you when the bond matures. It is also what the coupon rate is calculated on. It is fixed at issuance and never changes across the life of the bond.

The purchase price, however, is what the market determines based on current interest rates and the issuer’s credit standing. When you buy in the primary market (at issuance), you typically pay face value. When you buy in the secondary market, the price can be above or below face value.

Here is the key relationship: if market interest rates have risen since this bond was issued, the bond’s price falls below face value (trades at a discount) because newer bonds offer better rates, so this one has to look cheaper to attract buyers. If rates have fallen, the bond trades above face value (premium) because its coupon is now better than what new bonds offer.

At maturity, you always receive the face value regardless of what you paid. So if you bought at Rs 950, you receive Rs 1,000 at maturity. That Rs 50 difference is extra return on top of all the coupon payments you received.

3

So basically if I buy at a discount to face value I get a higher effective return than just the coupon rate. And if I buy at a premium I get a lower effective return. That’s essentially what YTM captures right? The return accounting for the price I paid vs the Rs 1,000 I get back?

4

Exactly right. YTM accounts for exactly that difference. The gap between your purchase price and the face value received at maturity, spread over the remaining years. You have connected it correctly.

5

so the face value is like the ‘promise amount’ at the end. market price moves up and down based on rates. at maturity everything converges back to face value. simpler than i thought honestly