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What is a Face-Amount Certificate?

John Lister
John Lister

A face-amount certificate is a type of debt security offered by an investment company rather than a corporation or government. It is simply a certificate that an investor buys, giving a guarantee that the issuing company will repay the money plus an agreed interest amount on a set future date. Though some companies still issue face-amount certificates, they have largely fallen from favor because of changes in tax laws.

The first face-amount certificates went on sale in 1894 through a company known as Investor's Syndicate. The certificates came under closer regulation through the 1940 Investment Company Act. Today, only two major companies, Ameriprise and SBM, still issue the certificates.

Man climbing a rope
Man climbing a rope

There are two main types of face-amount certificate. In one, the investor pays the issuer money in fixed installments. These may span the entire lifetime of the certificate, but in some cases the payments are concluded earlier. With the other type, known as a fully-paid face-amount certificate, the investor pays the full amount up-front. This type should normally carry a slightly higher interest rate, as the issuer has access to more of the investor's money for a longer period.

In many ways, a face-amount certificate resembles a bond or a certificate of deposit, but there are some key difference. Unlike a bond, the face-amount certificate is issued specifically by an investment company, rather than by a general corporation or government seeking to raise finance. That said, the investor still needs to assess the risk that the issuer will not be in business when the certificate comes due for repayment.

Unlike a certificate of deposit, or CD, a face-amount certificate is not insured by the Federal Deposit Insurance Corporation. This means that the investor is not protected against the issuing company's failure. One advantage, though, is that the penalties for early withdrawal of the money, known as surrendering the certificate, are lower than with a CD.

The main reason for the face-amount certificate's original popularity was that it had tax advantages. Specifically, the investor did not have to pay any tax on the interest earned on the certificate until cashing it in. This differs from many forms of income from investment such as interest on a savings account or dividends from a stock. Today, most face-amount certificates no longer carry this advantage.

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