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What is the face value of a bond and what role does it play in the purchase price of the bond?

Asked by Elian, Last updated: Sep 29, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Imagine the bond you buy as a piece of paper with 3 important pieces of information on it. First, you see the coupon rate, which is the amount of interest the issuer promises to pay you each year. The second is the face value.

The face value of the bond is the amount of money the issuer will pay you when the bond matures. The interest they pay you is always calculated against the face value. Third, you'll see the date to maturity. When you purchase a bond with a coupon rate of 7% with a face value of $100,000, how much would you pay if it were trading in the market at par? Excluding accrued interest, you would pay $100,000. to calculate this, think of the quoted bond price as a percentage of the face value.

Aprice of par or 100 means you must pay 100% of the face value to purchase the bond: $100,000 x 100% = $100,000 what if the price of the bond was trading below par at 96.50? You would pay 96.50% of the face value to purchase the bond (excluding accrued interest). So the purchase price would be $100,000 x 96.50% = $96,500.

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