The face value and market value of a bond are two important concepts in bond investing. Here’s an explanation of the differences between them:
Definition: The face value, also known as the par value, is the amount of money a bondholder will receive from the issuer when the bond matures. It is also the amount on which the bond’s interest payments are calculated.
Fixed Amount: The face value is a fixed amount set at the time the bond is issued. Common face values for bonds are $1,000, $5,000, or $10,000.
Interest Payments: The bond’s coupon payments (interest) are typically calculated as a percentage of the face value. For example, a bond with a face value of $1,000 and a 5% coupon rate will pay $50 in interest annually.
Definition: The market value of a bond is the price at which the bond is currently trading in the bond market. It fluctuates based on supply and demand, interest rates, and other economic factors.
Variable Amount: Unlike the face value, the market value of a bond can change over time. It may be higher or lower than the face value depending on various factors.
Interest Rate Influence: One of the primary factors influencing a bond’s market value is the prevailing interest rates. When interest rates rise, the market value of existing bonds typically falls, and when interest rates fall, the market value of existing bonds typically rises.
Face Value: Suppose you purchase a bond with a face value of $1,000.
Market Value: After some time, if interest rates rise, new bonds might be issued with higher coupon rates, making your bond less attractive. As a result, the market value of your bond might drop to $950. Conversely, if interest rates fall, your bond’s market value might rise to $1,050 because it offers a higher interest rate compared to new bonds.
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