Question

Face value of a bond is

• A. the rate at which a bond yields interest
• B. the price at which the bond is sold to buyers at the time of issue
• C. the annual interest rate paid by the bond issuer to the bond holder
• D. the discount rate which returns the market price of a bond without embedded optionality

Hint:

Face value is the printed (par) amount of the bond. Coupon rate and yield are rates, not amounts.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
A bond is a loan certificate. The buyer lends money to the issuer, and the issuer promises to pay interest and to return the principal on the maturity date. Every bond carries a printed amount on it, called its face value (also called par value).

Step 2: Key Formula or Approach:
The face value is the base amount on which the issuer calculates the interest, and it is the amount the issuer pays back at maturity. It is a fixed amount, not a percentage. Here, the closest description is the value at which the bond is first offered to buyers at issue.

Step 3: Check option (1).
The rate at which a bond yields interest is the coupon rate or the yield. It is a percentage, not a money value. So option (1) is wrong.

Step 4: Check option (2).
A bond is issued and sold at its stated (par) value. This stated value is the face value. So option (2) is the best match and is correct.

Step 5: Check option (3).
The annual interest rate paid by the issuer to the holder is the coupon rate. The coupon rate is applied on the face value, so it is a different thing. Option (3) is wrong.

Step 6: Check option (4).
The discount rate that returns the market price of a bond is the yield to maturity. It changes with the market, but the face value does not change. Option (4) is wrong.

Final Answer:
Face value is the stated value at which the bond is sold to buyers at issue. This is option (2).