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Understanding Denomination With Real World Example

Understanding Denomination With Real World Example

Understanding Denomination With Real World Example

What Is a Denomination?

A denomination refers to the classification of financial instruments such as currency notes, coins, securities, bonds, and other investments based on their stated or face value.

The denomination is used to quote the base currency in forex transactions or the quoted currency in financial assets. This helps define the acceptable payment in trades and the monetary unit in which it is priced. For example, it is used when indicating U.S. dollar-denominated bonds issued by a foreign government.

Key Takeaways

  • A denomination defines the monetary unit with which assets, securities, and transactions are priced.
  • Often, the denomination refers to the face value of the instrument, such as a bond’s par value denominated in U.S. dollars.
  • Collectible currencies may have a market value higher than their face value, like an old penny worth several hundred dollars today.

Understanding Denomination

A denomination is a unit of value given to money, currencies, and other financial instruments that have set values, such as government-issued bonds. The denomination value of a fixed-income security is often referred to as its "face value" because it appears on the front of the financial instrument.

In the United States, currency notes from ATMs are available in specific denominations. For example, some ATMs offer $20 bills and $100 bills, while others provide $10 and $50 notes. In a trade transaction, an exporter in Europe may invoice the buyer in U.S. dollars, making the transaction U.S. dollar-denominated. Beginning in 2011, commodities like crude oil could be quoted in other currency denominations, such as the euro.

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Foreign entities may issue securities denominated in a different currency. For instance, the government of Argentina has issued U.S.-dollar-denominated sovereign debt, and certain non-U.S. corporations issue shares denominated in dollars.

Par Values as Denominations

The denomination affixed to a bond or fixed-income investment is equal to the bond’s par value, which is the amount paid upon maturity. Bonds can be purchased in various denominations, ranging from $50 to $10,000. When buying a mutual bond, it is sold for an amount below the marked denomination because the difference between the sales price and the value at maturity serves a function similar to the interest earned in other investment vehicles.

Other securities also have par values, but the par value of a share of stock is not an accurate assessment of its importance in the marketplace. Instead, it represents a minimum value for the holding. When issuing common stock, corporations can issue them with a face value as low as zero or one cent to avoid legal liabilities.

Denominations and Nomenclature

Nomenclature is the act of applying a name to an item, and many currencies have official denominations as well as nicknames. For example, the Canadian dollar (CAD) is nicknamed the "loonie" because it has the image of a loon bird on one side. The American $100 bill is known as a "Benjamin" because it carries the picture of Benjamin Franklin.

Real World Example

Some individual currency pieces have a higher retail market value than their officially marked denomination. These currencies are collectible and sought after by hobbyists and alternative investors.

For example, some U.S. quarters produced between 1932 and 1964 contained 90% silver. Although their face value is 25 cents, the market value may be higher based on the price of silver, the melt value, the coin’s condition, and the date and mint involved. This difference between the denomination and the melt value led to a change in the materials used to produce quarters.

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For example, some U.S. quarters produced between 1932 and 1964 contained 90% silver. Although their face value is 25 cents, the market value may be higher based on the price of silver, the melt value, the coin’s condition, and the date and mint involved. This difference between the denomination and the melt value led to a change in the materials used to produce quarters.

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