What is Denomination?

Published by Thomas Herold in Banking, Laws & Regulations

'Denomination' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Denomination refers to a means of classifying the face value for financial instruments. This would involve currency coins and bank notes along with bonds and other kinds of fixed income investments. It can also refer to base currencies for which financial assets will be quoted in ultimately. Governments and companies find it useful to classify the types of acceptable forms of payments which can be used to complete a given transaction.

Such denominations represent the units of value which will most typically be assigned to represent a literal currency. This will include notes and coins used as currency, along with financial instruments that have preset values, like with bonds issued by sovereign governments. Such a value will commonly be referred to by its face value. This value is clearly denoted on the face (front side) of the financial instrument in question.

This becomes important where ATM automated teller machines are concerned. Those currency notes that ATMs dispense to customers will only come out in a set type of denomination. This could be $20s, $50s, and $100 bills. Where trade is concerned, European-based exporters could invoice their customers in American dollars. The transaction would then end up being a United States’ dollar denominated transaction. The majority of commodities like gold and diamonds are quoted in dollars still. Yet by 2011, other commodities like crude oil could also be quoted in a rival reserve currency like the euro, the pound, the Japanese Yen, or even the Chinese Yuan.

Bonds also come with face value denominations. These represent the value of the bond which will be paid back on maturity date. Investors can buy bonds in a range of denominations. The issuers will sell these bonds for lower than the face value. It is this difference from maturity value to sales price that serves as the total interest which would be earned on the investment by the purchaser or holder of the bond on maturity date.

Where stocks are concerned, stocks also have a par value and a denomination. Yet this value is commonly vastly different from the securities’ actual market value as determined by supply and demand on the stock market exchanges. Par values in fact refer to minimum values for the given security. The majority of stock issuers choose to set out a one cent par value per share in order to make sure that they do not end up guaranteeing a stock value which is higher than the actual market value.

Collectible currencies also carry denominations. These would often boast higher retail market values than their face value. It is always useful to consider a clear cut example of a difficult concept. American quarters which the mints struck from the years of 1932 to 1964 held 90 percent silver content. The face value was a mere tepid 25 cents. Yet the market value for such coins based on their generous silver content is significantly higher both when they were issued and still to this day.

This is because this melt value also enjoys a complimentary rarity and collectible value alongside it. Because the difference in the values between the denomination and the melt values were so high, the U.S. Mint finally accepted the recommendation to alter the materials which comprised these quarters to a far cheaper nickel-copper alloy starting in 1965.

The United States currency is presently denominated in a range of dollar amounts. These include the $100, $50, $20, $10, $5, $2, and $1 bills. As of 2017, the Federal Reserve System and Department of the Treasury have no intentions to alter the denominations which have been in use since at least the end of the Second World War.

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The term 'Denomination' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.