Face Value

Study guide: Exam FM-2

The face value (also called par value or nominal value) F of a bond is the principal amount stated on the bond certificate. It serves two purposes:

• The Coupon payment each period equals F \times r where r is the Coupon Rate per period

• When the bond is redeemed at par, the Redemption Value C = F

• The face value is not necessarily the price paid for the bond. A bond is bought at a premium when its price is above the redemption value (P > C) and at a discount when it is below (P < C). Only for a bond redeemed at par (C = F, the exam default unless a question says otherwise) is that the same as comparing the price with F, or the coupon rate with the Yield Rate; otherwise compare the yield with the modified coupon rate g = Fr/C.

Coupon from Face Value A 5{,}000 face value bond pays a 4% semi-annual coupon rate. Find the semi-annual coupon payment.

Answer Coupon per period = F \times r = 5000 \times 0.04 = 200 (if 4% is the semi-annual rate) or 5000 \times 0.04/2 = 100 (if 4% is the annual coupon rate paid semi-annually).