A:

Whether investors should focus more on a bond's current yield or face value largely depends on the end goals of the investments. When looking at short-term investments, the current yield gives a more accurate depiction of a bond's returns based on its market price. However, a bond's face value is still very important, especially if an investor is looking to hold a bond until maturity.

Bond Basics

Bonds are issued with a par value and a coupon rate, both of which are set at issuance and do not change over time. The par value of a bond is its face value and represents the bond's true worth. The coupon rate reflects the rate of interest the bond earns, expressed as a percentage of the par value. A bond with a $1,000 par value and a 5% annual coupon rate, for example, pays $50 each year in interest.

What Is the Current Yield of a Bond?

Because bonds can be bought and sold on the secondary market, and because prevailing interest rates often change, the market value of bonds fluctuates over time. This means a bond may sell for a price that is higher or lower than its par value.

The current yield of a bond is simply the amount of interest it pays per year in relation to its current selling price, rather than its par value.

If the bond in the above example sells for $800, then the $50 coupon payment actually represents a larger percentage of the bond's price than if it sold for par value. The current yield of this bond is $50 / $800, or 6.25%.

Comparing the current yields of various bonds can help investors ensure they are getting the greatest returns on their investments.

When Is Face Value Useful?

Investors need to look at the face value of bonds for many reasons. Face value is a crucial variable in a number of yield calculations and is the amount of money a bondholder receives when the bond matures. A bond's yield-to-maturity is greatly affected by its face value.

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