What Does the Face Value of a Bond Mean in Accounting and How Does It Affect My Returns?
There is a term face value related to bonds.
I’m not fully sure what it means in accounting terms. Does the face value have anything to do with the price at which a bond is bought or traded in the market?
I also want to know how the face value affects the interest I earn and whether it plays any role when I sell the bond before maturity.
Can you give a few examples to explain?
The face value of a bond is the amount the issuer promises to repay you at maturity.
In accounting, it is also called the par value and is recorded as the basic liability of the issuer.
For most Indian government and corporate bonds, this is usually Rs. 1,000 or Rs. 100 per bond. This number (face value) does not change, even if the market price of the bond moves up or down. Yes, both of them are different.
- Face value is the fixed amount the issuer will repay at maturity.
- The market price is the amount investors are currently willing to pay to buy the bond. The market price keeps changing based on interest rates and demand.
Here’s a simple example using a bond with Rs. 1,000 face value and 7% annual interest (coupon = Rs. 70/year).
When the market price changes, the yield changes because yield = (Annual Interest ÷ Market Price) × 100.
How Market Price Affects Bond Yield:
| Market Price (₹) | Annual Interest (₹) | Yield Calculation | Yield (%) |
|---|---|---|---|
| 900 | 70 | 70 / 900 × 100 | 7.78% |
| 1,000 (at par) | 70 | 70 / 1000 × 100 | 7.00% |
| 1,050 | 70 | 70 / 1050 × 100 | 6.67% |
| 1,200 | 70 | 70 / 1200 × 100 | 5.83% |
As the market price falls, the yield goes up.
As the market price rises, the yield goes down.
