Face Value vs Market Value Of Bonds: Key Differences Explained

Investors in fixed-income securities (such as bondholders) often assume that the value printed on the bond certificate is the price at which they can buy it. However, it is important to understand the difference between place value and face value of a bond. 

This eventually impacts your returns, yield expectations, and investment decisions. 

The face value of a bond remains constant throughout its life, but its market value changes with prevailing conditions. Factors such as prevailing interest rates, issuer credibility and overall demand affect the market price of a bond. There might be a chance that a bond with a face value of INR 1000 might trade for INR 950 in January and for INR 1080 in April. 

If you are a fixed-income securities investor or wish to be one, it is important to understand the difference between the two and to understand how bond pricing works before making the investment decision. 

What Is The Face Value Of A Bond? 

The face value of bond refers to the principal value or reference amount on which coupons and maturity repayments are calculated. It is also called par or nominal value. For example, if an organisation issues bonds with a face value of INR 1000, with a coupon calculated at 8%, repayable at a premium of 10%, it implies that the coupon per year will be INR 80, and the maturity value shall be INR 1100.

In many plain-vanilla bonds, this is also the amount repaid at maturity. However, some bonds may be structured to redeem at a premium or discount, depending on their terms of issue.

Besides calculating the coupon amounts, the face value is used for determining:

• Maturity amount
• Yield calculations
• Bond issuance pricing

When investors search for par value bond India, they are generally referring to this original value assigned at issuance. The par value of a bond is different from the stock price which changes gradually and at times, dramatically due to the market volatility. The face value remains consistent. 

What Is The Market Value Or Price Value Of A Bond?

The market value or price value of a bond refers to the price at which the bond is currently trading. The price is dependent on a wide range of factors, including prevailing interest rates, credit quality, liquidity, and market sentiment.

For instance, if the current coupon rate on bonds is around 5.5%, a bond issued a year ago offering 8.5% will be more attractive to investors due to the additional guaranteed coupon. Hence, the market value of such a bond will rise (and vice versa). This relationship forms the basis of bond face value vs market value analysis.

It is critical for investors to understand how a bond's market price is determined, especially when they purchase bonds in the open market rather than directly from the issuer. Understanding this is also critical to know how premium or discount bonds are issued. 

Why Market Price Moves Away From Face Value?

Here are the most critical factors for this:

1. Interest Rate Movements

Interest rates are the most critical factors driving bond market prices. The role of the RBI is also critical in this context. For example, when RBI policy rates rise, newly issued bonds start offering higher coupon rates. Older bonds with lower coupon payments become less attractive, causing their prices to fall, and vice versa.

The inverse relationship between bond prices and yields forms the fundamental basis for fixed-income securities investments. 

2. Credit Risk of the Issuer

During the lifetime of a bond, if at any point the bondholders have reason to believe that the issuer's financial performance or position has deteriorated, the bond's market price will fall. For example, bonds issued by highly rated PSUs or government-backed institutions often trade closer to face value due to lower perceived risk.

3. Liquidity and Market Demand

Liquidity refers to how quickly and easily a bond can be traded in the open market. When there are a large number of buyers and sellers for a bond in the market, the liquidity remains high due to the demand. On the other hand, illiquid bonds can experience greater price volatility.

Trading At Premium vs Discount vs Par: Real Examples

Here are the three primary ways in which a bond can trade:

Face Value In Equity vs Bonds: Are They The Same?

Both equity shares and bonds have a face value, but their implications differ. For equity shares, the face value is the original cost of a share determined by the company at the time of issuance. Shares are generally issued and traded at a premium, which can be any percentage of the face value. 

On the other hand, the face value of bonds determines:

• Coupon payouts
• Maturity repayment
• Yield calculations

This makes the bond's face value far more relevant to investors. Platforms like Grip Invest display details such as face value, coupon rate, yield, and maturity structure transparently, helping investors better understand what they are purchasing before investing.

Conclusion

When investing in fixed-income securities such as bonds or debentures, it is important to understand how they add value to your portfolio, the coupon rates, and the low risk assumed for a decent ROI. At the same time, it is equally important to understand the distinction between face value and market value. While face value determines the repayment amount and coupon calculations, market value reflects real-time investor sentiment and interest rate conditions.

The key factor here is to evaluate the current market price of a bond and link it with the reasons. This knowledge helps fixed-income investors make better-informed decisions. 

FAQs On Face Value And Market Value Of Bonds

Author: Grip Invest Editorial Team The Grip Invest Editorial Team is a group of Chartered Accountants, MBA (Finance) graduates, and Qualified Research Analysts dedicated to helping you invest smarter. We dive deep into India's fixed income landscape to deliver content that is accurate, up-to-date, and easy to understand. Whether you're exploring bonds, fixed deposits, or other fixed income opportunities, our guides cut through the noise and give you the clarity to make better financial decisions.

Want to stay at the top of your finances? 

Join the community of 4 lakh+ investors and learn more about Grip Invest, the latest financial knick-knacks, and shenanigans in the world of investing.

Happy Investing!

Disclaimer - Investments in debt securities/municipal debt securities/securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading.
This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for consequences of any actions taken based on the information provided. For more details, please visit www.gripinvest.in

Registered Address - 106, II F, New Asiatic Building, H Block, Connaught Place, New Delhi 110001