Face-amount certificate

Face-amount certificate:

A face-amount certificate is similar to a certificate of deposit or a bond in many aspects, but there are some significant differences. The face-amount certificate, unlike a bond, is issued by an investment company rather than a public company or government trying to raise funds. However, the investor must still consider the possibility that the issuers will be out of business once the certificate is due for repayment. 

Unlike certificates of deposit, face-amount certificates are not covered by FDIC (Federal Deposit Insurance Corporation). This implies that the investor isn’t secured from the failure of the issuing company. 

What is a face-amount certificate? 

A face-amount certificate (FAC) is a legal agreement between an investor and an issuer that commits the issuer to pay the investor the specified amount (face amount) on a specific date in the future.  

The investor consents to give the issuer a predetermined quantity of money, either all at once or over time, in exchange for this future payout. The investment is referred to as a completely paid face amount certificate if the investor makes one lump sum payment for the certificate. 

Strengths of face-amount certificate 

The following are the strengths or advantages a face-amount certificate can offer: 

• Compared to savings accounts, checking accounts, and short-term certificates of deposit, face amount certificates often offer greater interest rates since they tie up your money for longer. 
• Face amount certificates have the benefit of frequently being purchased in installments rather than all at once. This is helpful if you wish to make regular investments to accumulate wealth. 

Tradeoffs of face-amount certificate 

There are some tradeoffs of face-amount certificates. They include: 

• The certificates do not have liquidity as checking accounts, savings accounts, and domestic bank certificates of deposit, even though you can redeem them for the face amount at maturity or the surrender value before maturity. 

• The Federal Deposit Insurance Corporation does not provide insurance for Face amount certificates. You should depend on the issuing company’s assurance that you will be paid. 
• For taxation reasons, face amount certificates are regarded as a type of endowment contract. They fall under the Original Issue Discount (OID) regulations since they have a longer maturity and are interest-bearing due to this.  

Fully or a part of the estimated interest is taxable on an accrued basis under the OID regulations. Even if you still need to get the interest, you still need to pay for some of it. OID is often defined as the discrepancy between the face amount and the sum you pay for the contract. Throughout the certificate, you must include a portion of the OID in your income.  

You must receive a statement on Form 1099-OID from the issuer that details the annual sum you should include in your income. 

Liabilities of face-amount certificate 

https://www.poems.com.sg/unit-trusts/With the benefits of a face-amount certificate, there are some potential drawbacks. 

One downside is that the investor needs help to access the money during the investment term. If the investor needs to access the funds for any reason, they will be subject to an early withdrawal penalty. Additionally, if the issuing company goes bankrupt, the investor may not receive the full value of their investment back. 

Despite the potential drawbacks, face-amount certificates can be a good option for investors looking for a guaranteed rate of return. If you are considering investing in a face-amount certificate, research the issuing company carefully to ensure they are financially stable and have a good reputation. 

How does a face-amount certificate work? 

We know that a face-amount certificate is a contract between the investor and the issuer.  

If the investor purchases the certificate in one payment, it is referred to as a “fully paid” face-amount certificate. The investor agrees to pay the issuer a predetermined amount, either in regular payments or all at once. 

Owners of the FACs are typically compensated with a specified amount of yearly interest in exchange for providing the firm with this money. They are later reimbursed their shares’ principal, or the face value, at a fixed termination date. 

Face-amount certificate firms are organisations that issue FAC securities. Using certain tangible assets under the company’s control, they can use this strategy to acquire finance at a reasonably cheap interest rate. 

Frequently Asked Questions