Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Face-Amount Certificate Company

What it is:

A face-amount certificate company is a company that borrows from investors and offers its assets or other securities as collateral.

How it works (Example):

For example, let's assume that Company XYZ is a privately held investment company that wants to acquire two companies. The company wants to borrow the capital it needs to do so.

To raise the money, Company XYZ asks a group of investors to lend it $10 million. It offers the assets of its existing portfolio of investments as collateral. Because the debt is collateralized, Company XYZ offers to pay the lending investors a lower rate of 5% for five years. The investors receive certificates good for the amount they've lent to Company XYZ.

This amount, the face amount, is the principal on which the investor will earn interest from Company XYZ. The investors can redeem their certificates at maturity for the face value; alternatively, they can redeem the certificates early for a predetermined surrender value.

The investors agree, and Company XYZ proceeds to pay the lending investors $500,000 of interest each year. At the end of the fifth year, the company repays the $10 million. 

Why it Matters:

Face-amount certificate companies are rare, but they are able to get cheaper financing because they are able to collateralize their debt with assets that they can control. Their method of financing is regulated by the Investment Company Act of 1940.