The face amount of a bond is the principal stated on the instrument, the sum the issuer must repay when the bond matures, and the base the stated interest rate is applied to. Face amount, face value and par value are three names for that one number, though par value on a share of stock is a different concept, covered in common stock. The issuer promises to pay a specified rate of interest during the life of the bond and to repay the principal, also known as face value or par value of the bond, when it matures (SEC, Investor.gov, Bonds).
What the Face Amount Sets
On a bond whose principal does not move, the coupon is arithmetic on the face amount, not on what anyone paid for the bond. Interest is earned at the set rate on the par value of the bond or note (TreasuryDirect, Understanding Pricing and Interest Rates). Divide the annual amount by the number of payments a year to get one period’s coupon.
Face amount 250,000
Stated annual rate 4%
Payments per year 2
Annual coupon 250,000 x 4% = 10,000
One payment 10,000 / 2 = 5,000An inflation-indexed security is the exception. Its principal goes up and down with inflation and deflation, and while the interest rate is fixed, the amount of interest paid every six months may vary with the change in principal (TreasuryDirect, Understanding Pricing and Interest Rates).
Par, Discount and Premium Describe the Price
Those three words describe what a buyer pays, not the face amount. A bond or note prices at par value when the yield to maturity equals the interest rate, below par value when the yield is greater, and above par value when the yield is less (TreasuryDirect, Understanding Pricing and Interest Rates). The coupon is identical in all three cases, because it was fixed against a face amount that never moved.
The issuer’s own balance sheet reports a carrying amount instead, the face amount adjusted by any unamortized discount or premium, and how amortization brings that carrying amount back to face is worked through in bonds payable.
The Face Amount on the Tax Side
The original issue discount (OID) rules do not name the face amount. Section 1273(a)(1) defines OID as the excess of a debt instrument’s stated redemption price at maturity over its issue price, and that redemption price is the sum of all payments the instrument provides other than qualified stated interest, meaning stated interest unconditionally payable in cash or in property other than the issuer’s own debt instruments, at least annually at a single fixed rate (Treasury Regulation 1.1273-1(a), (b) and (c)(1)(i)).
On an ordinary bond paying a fixed cash coupon at least once a year the coupons meet that test, so the stated redemption price at maturity is the principal due at maturity, which is the face amount. A small enough discount drops out of the accrual rules. Where it is less than 0.0025 multiplied by the product of the stated redemption price at maturity and the number of complete years to maturity from the issue date, the OID is treated as zero and all stated interest is treated as qualified stated interest (Treasury Regulation 1.1273-1(d)(1) and (d)(2)).
The holder is not finished with it. That de minimis discount comes into income as stated principal payments are made, and the amount included is treated as gain recognized on retirement of the debt instrument (Treasury Regulation 1.1273-1(d)(5)(i) and (ii)(A)).
Qualified stated interest is reported in box 2 of Form 1099-OID, or on Form 1099-INT instead, and the OID in box 1, filed when the total daily portions of OID for a holder are at least $10 (IRS, Instructions for Forms 1099-INT and 1099-OID).
What a Holder Receives Is Not Always the Face Amount
When an issuer calls its bonds it pays investors the call price, usually the face value of the bonds, together with accrued interest to date, and sometimes a call premium is also paid (SEC, Investor.gov, Callable or Redeemable Bonds). An amortizing structure runs the other way. An installment obligation pays an amount other than qualified stated interest before maturity (Treasury Regulation 1.1273-1(e)(1)), so principal returns in pieces and the amount outstanding drops below the number printed on the instrument.
Face Amount on a Life Insurance Policy
The same phrase names a different number on an insurance policy, the amount stated in the policy itself, with no coupon behind it. A firm runs into that second sense on estate work, where Form 712 asks for the face amount of the policy on line 15, separately from indemnity benefits, additional insurance and accumulated dividends (IRS, Form 712, Life Insurance Statement, Part I).
Common Questions
No. Denominations differ by issuer. The minimum purchase for a Treasury bond is $100 and they are sold in increments of $100 (TreasuryDirect, Treasury Bonds).
Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can put a block of its own debt schedules and OID work through a trial task before anything client facing depends on it.
