Face Value: Meaning, Importance, Examples, and Real-World Applications

Definition of Face Value

Face Value refers to the nominal or stated value printed on a financial instrument such as a bond, share certificate, or currency note. It represents the original value of the security as determined by the issuer, not its current market value.

For example, if a company issues a share with a face value of ₹10, that is the nominal value recorded in the company’s books, regardless of whether the share trades at ₹150 or ₹200 in the stock market.

Meaning of Face Value in Detail

Face value plays a crucial role in finance and accounting because it forms the foundation for pricing securities, dividend distribution, bond interest calculations, and capital structure reporting. While market value reflects the demand and supply dynamics, face value is fixed at issuance and typically does not change.

For instance, bonds usually have a face value of ₹1,000 or $100, and companies promise to repay this amount at maturity. Similarly, shares often carry a face value of ₹1, ₹2, ₹5, or ₹10 in India, though their market prices can fluctuate daily.

Thus, face value is:

A legal and accounting benchmark for securities.
The basis for dividend calculation in equity.
The reference value for bond repayment at maturity.

Breaking Down the Concept

In Shares (Equity)

The value printed on the share certificate.
Determines company’s share capital (Face Value × Number of Shares).
Used to calculate dividend distribution (e.g., 50% dividend on a ₹10 face value share = ₹5 dividend).

In Bonds and Debentures

The amount the issuer promises to repay at maturity.
Interest (coupon) is calculated on face value, not market value.

In Currency Notes

The denomination printed (₹10, ₹100, $50, etc.) is its face value.

In Mutual Funds / IPOs

Shares are often issued at face value during IPOs. Investors pay premium over face value depending on demand.

Formula for Face Value

In most cases, face value is predefined, not calculated. However, it appears in formulas:

Share Capital = Number of Shares × Face Value

Bond Redemption Value = Face Value of Bond × Number of Bonds

Example Calculation

Equity Example:
A company issues 1,00,000 shares with a face value of ₹10.

Total Share Capital = 1,00,000 × ₹10 = ₹10,00,000

If the company declares a 40% dividend:

Dividend per share = 40% of ₹10 = ₹4 per share

Bond Example:
A company issues 1,000 bonds at ₹1,000 face value, 8% coupon rate.

Annual Interest = 8% of ₹1,000 = ₹80 per bond
Total Annual Interest = 1,000 × ₹80 = ₹80,000

Journal Entry Example (Accounting Term)

When Shares are Issued at Face Value:


Bank A/c                 Dr.      1,00,000
     To Share Capital A/c                  1,00,000
(Being 10,000 shares of ₹10 each issued at face value)

When Shares are Issued at Premium (Above Face Value):


Bank A/c                 Dr.      1,50,000
     To Share Capital A/c                  1,00,000
     To Securities Premium A/c              50,000
(Being 10,000 shares of ₹10 issued at ₹15 each)

Detailed Illustration (Accounting Calculation)

Suppose a company issues:

50,000 shares of ₹10 each = ₹5,00,000
Issued at ₹12 (₹2 premium per share).

Journal Entry:


Bank A/c                 Dr.      6,00,000
     To Share Capital A/c                  5,00,000
     To Securities Premium A/c             1,00,000

Here, Face Value = ₹5,00,000, Premium = ₹1,00,000, Total Proceeds = ₹6,00,000.

Key Features of Face Value

Fixed at issuance.
Printed on certificate or bond.
Legal/accounting value, not market-driven.
Used for dividend and interest calculation.
Forms the basis of share capital in balance sheets.

Importance of Face Value in Business

Helps determine company’s authorized and paid-up capital.
Ensures accurate accounting of securities.
Provides transparency in financial reporting.
Affects investor perception during IPOs.
Influences tax and regulatory compliance.

Advantages and Disadvantages

Advantages:

Provides consistency and legal clarity.
Simplifies dividend and interest calculation.
Essential for bond redemption and maturity.

Disadvantages:

Does not reflect true market value.
Can mislead inexperienced investors if confused with actual worth.

Usage of Face Value

In issuing shares and bonds.
In dividend and coupon calculations.
For accounting entries of capital.
In regulatory filings and balance sheets.

Case Studies

Reliance Industries Limited (RIL)

RIL originally issued shares at a face value of ₹10. Over decades, the market price grew into thousands, but dividend declarations always referred to the face value, not market price.

Indian Government Bonds

Government securities (G-Secs) carry a fixed face value (₹100), while their market trading price fluctuates depending on interest rates.

Practical Example

A bank issues a Fixed Deposit Receipt (FDR) with a face value of ₹10,000.

Interest of 6% annually = ₹600.
On maturity, investor receives face value (₹10,000) + interest (₹600) = ₹10,600.

Common Mistakes or Misunderstandings

Confusing face value with market value or book value.
Assuming high face value means higher worth (it doesn’t).
Thinking dividends are on market price (actually on face value).

Real-Life Applications and Legal Implications

Companies must disclose face value in balance sheets.
Securities laws (like SEBI in India) require clear mention of face value in IPOs.
Bond issuers are legally obligated to repay face value at maturity.
Currency face value determines legal tender status.

FAQs

Q1: Is face value the same as market value?
No. Face value is the nominal value, while market value changes with demand-supply.

Q2: Can face value change?
Generally no, but companies may change it through stock split or consolidation.

Q3: Why is dividend based on face value?
Because dividends are declared on nominal capital, ensuring fairness among shareholders.

Q4: What is the face value of Indian currency notes?
The denomination printed, like ₹10, ₹100, ₹500, etc.

Expert Tip from Learn with Manika

When analyzing investments, never confuse face value with market value. Always check whether dividends, interest, or maturity payments are linked to face value or market value. This prevents costly mistakes in financial decision-making.

Related Terms

Market Value
Book Value
Par Value
Premium on Shares
Discount on Bonds