Face value of a bond

Face value, or par value, is the base quantity of a bond issue: the principal attributable to one bond, which the issuer undertakes to repay to the holder on the maturity date. It is fixed in the issue resolution before trading begins and does not depend on the price at which the bond was bought on the exchange or on what it fetches now. Face value is set in the currency of the issue, so for foreign-currency bonds it is not expressed in roubles.

Almost everything else is calculated from face value

The coupon is set not as an amount but as a rate on face value: multiplying that rate by the face value and by the fraction of the year elapsed under the day count convention gives the coupon payment and the accrued interest. The terms of the issue are measured against face value in the same way: the buyback price at a put option, the size of an amortisation payment, a covenant threshold. Face value is therefore not a decorative line in the prospectus but the denominator to which all of the bond's cash parameters are scaled. With amortisation, this denominator shrinks with each repayment of principal, and the coupon, while remaining the same rate, yields an ever smaller amount. For issues with an inflation-indexed face value, by contrast, face value rises together with the consumer price index, and what is repaid at maturity is no longer the original amount.

Example: one parameter, different issues

Each bond in this list has its own face value, and it is face value that turns percentages into roubles: the same coupon rate on two issues with different face values produces different payments, and the same quote produces a different settlement amount for a trade. Issues can only be compared with one another once they have been brought to face value; otherwise one is comparing quantities that are not comparable.

What face value is not

Face value is neither a price nor a guarantee. It shows how much the issuer promised to repay, not what it will actually repay: in a default, face value remains an entry in the documents, while the actual recovery is determined by the enforcement process. The second confusion is calculating yield from face value. Yield to maturity is calculated from the price paid for the bond, including accrued coupon, not from the nominal amount, so the coupon rate and the yield coincide only when the purchase was made at par. Finally, there are cases where the term degenerates: a perpetual bond has no maturity date, and its face value serves only as the base for the coupon, while a discount bond has no coupon at all, and the entire return comes from the gap between the purchase price and face value.