In finance, the term face value denotes the value at which a security can be redeemed for underlying assets. The face value of a coin or banknote, for example, dictates the value at which it can be redeemed for goods or services.
In trading, the term face value is most commonly used in connection with bonds and other debt instruments. The face value of a bond defines the amount of money for which the bond can be redeemed when it reaches maturity.
A bond’s face value is normally equal to the bond principal – the amount loaned by the investor to the company or government agency through the purchase of the bond. However, the face value of a bond may also higher than the amount paid for it (See: zero coupon bonds).
The face value of a preferred share or a participation certificate determines the dividends paid out to its holder. This may differ from its market value – the price offered for the share or certificate on the secondary market.
In relation to life insurance, the term face value denotes the benefit of a whole life insurance policy at the time that the policy matures. See also: Life insurance face value).
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