What Is the Face Value of a Bond?

Interest Rate

The annual interest rate a bond pays is expressed as a percentage of par, or face value, at issuance. For example, an 8 percent bond will pay 8 percent interest, or $80, for each $1,000 of face value. This "official," or nominal, interest rate is called the coupon rate. However, once the bond is issued, the payment is set in dollars, in this case $80, and does not change.


At maturity, the bond investor is to be repaid the full face value, regardless of how much he paid for the bond.


Once issued, bonds can trade in the secondary market for more or less than the face value--at a premium or at a discount. Bonds are priced as a percentage of par, or face value. A price of 100 means 100 percent of the $1,000 face value, or $1,000. A price of 97.3 means $973 for each $1,000 of face value.


When an investor says that he wants to buy five bonds, he means five $1,000 face value bonds, or $5,000 worth of a particular bond. If the price of the bond is 97.3, he will end up paying $4,865 for $5,000 face value bonds. At maturity, he will get back $5,000 and realize a $135 capital gain on his investment, in addition to the annual interest he will have received.


The confusing part is the current yield vs. the coupon rate. The investor will collect $80 in interest annually, which on a $1,000 face value amounts to 8 percent--the "official" coupon rate. But if he paid $973 per $1,000, his annual yield, or return on his investment, would be $80 divided by $973, which is 8.2 percent.