What is the Face Amount?

Face Amount

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Face Amount

The term “face amount” is often used in the context of financial instruments like bonds and life insurance policies, and it refers to the nominal value or principal amount that is payable to the holder of the instrument.

  • Bonds: For a bond, the face amount (also known as par value or principal) is the amount that the issuer promises to repay once the bond matures. The face amount of a bond is typically stated on its face or certificate, hence the name. Although bonds can be issued at discounts or premiums to their face amounts, they always mature at their face amount. Interest payments on a bond are usually a percentage of the face amount.
  • Life Insurance: In a life insurance policy, the face amount is the death benefit. This is the money that the insurance company agrees to pay to the beneficiary when the insured person passes away, as long as the policy is in effect at the time of death.

The face amount of an instrument does not include any interest or dividends that might accrue over the life of the instrument. These are calculated separately and are in addition to the face amount.

Example of Face Amount

I can provide an example for both contexts in which “face amount” is commonly used:

  • Bonds: Let’s say a corporation issues a bond with a face amount of $1,000, which is the most common face amount for a bond. This means that when the bond matures, the bondholder will receive $1,000 from the issuer, regardless of how much they originally paid for the bond. If the bond has a 5% annual interest rate, the bondholder will also receive interest payments of $50 per year (5% of $1,000) for the life of the bond.
  • Life Insurance: Suppose an individual purchases a life insurance policy with a face amount of $500,000. This means that if the individual passes away while the policy is in effect, the insurance company will pay $500,000 to the beneficiary named in the policy. The policyholder pays premiums to the insurance company to keep the policy in effect, and these premiums are calculated based on various factors, such as the policyholder’s age, health, and the face amount of the policy.

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