Legal Definitions - face-amount certificate

A face-amount certificate is a type of investment security where an investor pays a sum of money, either as a single lump sum or through periodic installments, to an issuing company. In return, the company contractually promises to pay the investor a fixed, predetermined amount (the "face amount") on a specified future date, known as the maturity date. These certificates are essentially long-term savings contracts that guarantee a specific return.

• Example 1: Saving for a Child's Education

  Maria wants to save for her newborn daughter's college education. She invests in a face-amount certificate, agreeing to make monthly payments of $200 to a financial institution for 18 years. The certificate guarantees that in 18 years, the institution will pay her a fixed sum of $50,000, which is the face amount. This provides a predictable and guaranteed sum for her daughter's future expenses.

  How it illustrates the term: Maria's regular payments are the installments, the $50,000 is the fixed "face amount" promised at the maturity date (18 years later), and the certificate itself is the contractual agreement guaranteeing this return.

• Example 2: Retirement Income Planning

  After receiving a large inheritance, David, who is nearing retirement, wants to ensure a guaranteed income stream in 10 years. He uses a portion of his inheritance to purchase a face-amount certificate for a single lump sum of $100,000. The certificate specifies that in 10 years, the issuing company will pay him $150,000, providing a secure, predetermined boost to his retirement funds.

  How it illustrates the term: David's initial $100,000 is the lump-sum payment, and the $150,000 is the "face amount" that the company is contractually obligated to pay him on the maturity date, offering a predictable return on his investment.