Face Value

Face value is the pre-determined value of financial instruments such as common stock and bonds. The face value is also referred to as par value or nominal value. This value is constant and it is not affected by market forces of demand and supply as it is in the case of market price.

Where does Face value apply?

Face value is applicable when financial instrument such as common stock and bonds are being issued in the market.

Face value or nominal value is required when paying returns such as dividends or interest to the stakeholders/investors.

How does Face value work?

Face value is determined when a firm is being incorporated whereby, the business promoters state in the capital clause in the memorandum of association and it is this value which is used as the benchmark to compute the returns to be paid.

Illustration of how face value works

If the issued common stock is 100,000 at an issuing price of $10, then the total authorized capital is $1,000,000

In this case, the $10 is the face value of each unit of common stock and the product of the total units (100,000) and the face value ($10) translates to the authorized share capital of the firm

If the firm makes net profits after tax of $120,000 and the management declares final dividend of 5% of common stock then, the ordinary share dividends (which are returns for the investors) will be computed as follows;

5% *100,000*10=$50,000

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.