face value
(noun)
The amount or value listed on a bill, note, stamp, etc.; the stated value or amount.
Examples of face value in the following topics:
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Bonds Issued at Par Value
- To record a bond issued at par value, credit the "bond payable" liability account for the total face value of the bonds and debit cash for the same amount.
- Consider a 3-year bond with a face value of $1,000 and an effective interest rate of 7%, sold at face value.
- Since the bond is sold at face value, the proceeds are $1,000.
- When a bond is issued at par value it is sold for the face value amount.
- Since the bonds are sold at par value, the amount of cash the company receives should equal the total face value of the issued bonds.
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Bond Valuation Method
- A bond's value is measured by its sale price, but a business can estimate a bond's price before issuance by calculating its present value.
- Whether the amount the business will receive equals its face value depends on the difference between the bond's contract rate and the market rate of interest at the time the bond is issued .
- Regardless of what the contract and market rates are, the business must always report a bond payable liability equal to the face value of the bonds issued.
- If the market rate is greater than the coupon rate, the bonds will probably be sold for an amount less than the bonds' face value and the business will have to report a "bond discount. " The value of the bond discount will be the difference between what the bonds' face value and what the business received when it sold the bonds.
- The business will then need to record a "bond premium" for the difference between the amount of cash the business received and the bonds' face value.
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Bonds Issued at a Premium
- When a bond is sold at a premium, the difference between the sales price and face value of the bond must be amortized over the bond's term.
- Assume a business issues a 10-year bond that has an effective annual interest rate of 6%, with a face value of $100,000.
- When a bond is issued at a premium, that means that the bond is sold for an amount greater than the bond's face value.
- A liability, titled "bond payable," must be created and credited by an amount equal to the face value of the issued bonds.
- For example, assume a business issues a 10-year bond that pays 6% interest annually, with a face value of $100,000.
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Factors Affecting the Price of a Bond
- A bond's book value is affected by its term, face value, coupon rate, and discount rate.
- Note that the trading value of a bond (its market price) can vary from its face value depending on differences between the coupon and market interest rates.
- A bond's coupon is the interest rate that the business must pay on the bond's face value.
- A bond's value is measured based on the present value of the future interest payments the bond holder will receive.
- Explain how a bond's value is affected by its term, face value, coupon and discount rate
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Issuing Bonds
- The market price of a bond is expressed as a percentage of nominal value.
- For example, a bond issued at par is selling for 100% of its face value.
- Bonds can sell for less than their face value, for example a bond price of 75 means that the bond is selling for 75% of its par (face value).
- Bonds are considered issued at a discount when the coupon interest rate is below the market interest rate.That means a company selling bonds at a discount rate receive less than the face value of the bond in the sale.
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Bonds Payable and Interest Expense
- Journal entries are required to record initial value and subsequent interest expense as the issuer pays coupon payments to the bondholder.
- Bonds derive their value primarily from two promises made by the borrower to the lender or bondholder.
- The borrower promises to pay (1) the face value or principal amount of the bond on a specific maturity date in the future, and (2) periodic interest at a specified rate on face value at stated dates, usually semiannually, until the maturity date .
- Example of bonds issued at face value on an interest date:-
- On 2010 December 31, Valley issued 10-year, 12% yield bonds with a USD 100,000 face value, for USD 100,000.
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Valuing Zero-Coupon Bonds
- The value of a zero-coupon bond equals the present value of its face value discounted by the bond's contract rate.
- Instead, the entity will sell the bond at lower than face value.
- When the bond's term is over, the issuing business will repay the bond at its face value.
- Zero-Coupon Bond Value = Face Value of Bond / (1+ interest Rate)
- The amount the company pays at the end of the term equals the bond's face value.
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Bonds Issued at a Discount
- For the issuer, recording a bond issued at a discount can be a little more difficult than recording a bond issued at par value.
- Because the issuer receives less cash for the bond than the face value, this difference must be recorded in the company records as a discount expense.
- As a result, the bond must be sold at an amount less than its face value.
- When a bond is sold, the company records a liability by crediting the "bonds payable" account for the bond's total face value.
- The business then debits the difference between the bond's face value and what it receives in cash from the sale.
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Redeeming at Maturity
- The carrying value of bonds at maturity will always equal their par value.
- In other words, par value (nominal, principal, par or face amount), the amount on which the issuer pays interest, and which, most commonly, has to be repaid at the end of the term.
- For a bond sold at discount, its carrying value will increase and equal their par value at maturity.
- For a bond sold at premium, its carrying value will decrease and equal the par value at maturity.
- Some structured bonds can have a redemption amount that is different from the face amount and can be linked to performance of particular assets such as a stock or commodity index, foreign exchange rate or a fund.
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Amortized Cost Method
- Debt held to maturity is classified as a long-term investment and it is recorded at the market value (original cost) on the date of acquisition.
- All changes in market value are ignored for debt held to maturity.
- The accounting records show the debt at the amortized cost (face amount plus premium/less discount) and the difference between the maturity value and the cost of the bonds is amortized to the income statement over the life of the bonds.