Denomination

Denomination is a word we are all familiar with when it comes to the money that we use every day. You can, for instance, only find sterling banknotes in £5, £10, £20 or £50 denominations. However, you will also hear phrases like “assets denominated in X” or a “Y denomination bond” in the investment world and it is important to understand the use in these contexts.

As well as being the unit classification for the face value of the notes in your wallet, denomination also refers to the stated value of bonds and other securities, and therefore the acceptable currency in which the asset can be traded. You will often see governments denominating their bonds in US dollars rather than their own frequently fluctuating currencies, or international companies issuing dollar-denominated shares.

While the greenback has been the world’s reserve currency for time immemorial, it now seems likely that we will see an acceleration of the trend towards international trading denominated in other global currencies as geopolitical complexity increases; many now think we are seeing an emerging “multipolar” world. Currency movements mean that the denomination of the assets you buy and sell can make a very significant impact on your investment returns, and this is particularly important if you have to convert to a certain currency for large outlays, such as a mortgage.

A less obvious but very important third use of the term denomination relates to the pricing of bonds. The denomination of a fixed income instrument refers to its “par value” or the amount it is worth upon its maturity – the amount you as the investor gets back. This is not the same as the bond’s price as this will fluctuate throughout the term of the debt, according to what the risk of default by the country or company is, or how much inflation is rising and therefore eroding the value of the par value when the money is due to be paid back. Thus, a bond’s denomination might be £100 but it could be selling at a “below par” price of £95.