It is crucial for investors to comprehend the fundamental idea behind the face value of shares and bonds. A publicly traded corporation that offers its stocks through Initial Public Offerings (IPOs) sets a price that corresponds to the face value of each share. It is only the cost at which you buy shares of a specific corporation.
Face value, also referred to as the par value, is the amount that the corporation is valued at in its books and on its stock certificates. Once the corporation decides to issue its shares and bonds, it sets the price.
At face value, all corporations issue bonds, and shares. The face value of shares issued by a specific corporation is not determined by any set standards. Usually, the business assigns it at random. From the standpoint of the business, determining face value is crucial since it enables the entity to determine the accounting value of its shares.
The balance sheet for this company then uses this value.
The face value of a security is a significant factor for determining several crucial characteristics of shares and bonds. Face value can be used to determine:
- Shares’ market value
- Premiums \ Returns
- Interest charges
If a business must raise Rs 10 crore from the market to fund its operations, it can do so by selling 10 lakh bonds having a face value of Rs 100 apiece.
The corporation will compute the different associated costs, such as interest payments, using the face value it has set. If the corporation chooses to charge a 3 percent interest rate on its bonds, its yearly distribution expense will be Rs 30,000.
Corporate decisions, such as stock splits, can alter the face value of shares. When a firm splits its stock, the current shares are divided into new ones that have a lower face value.
For instance, if a corporation announced a stock split of 1:1, it meant that one existing share had been split into two units with face values of Rs 10 each. The full worth of a company’s shares can be realized by a stock split, which is a measure to boost liquidity.