Definition
Original face is a term used in the field of finance which refers to the total principal value or amount of a mortgage-backed security at the time it is issued. It represents the initial outstanding balance of loans used to back the security. Over time, the original face decreases due to scheduled payments or prepayments by the borrowers.
Phonetic
The phonetics of the keyword “Original Face” would be: Original – /əˈrɪdʒɪnəl/Face – /feɪs/
Key Takeaways
Here are the three main takeaways about the Original Face:
- Original Face is a concept in Zen Buddhism that represents the true self, the essential nature that exists beyond societal labels and personal identities.
- The practice of seeking one’s original face is a way to pursue enlightenment, by looking beyond the masks we wear in daily life and searching for the pure, unaltered essence of our being.
- The term is often used in Zen teaching as part of a koan, or a paradoxical riddle meant to challenge students and help them break free of standard ways of thinking and perception.
Importance
The term “Original Face” refers to the total value of a bond issue or loan, also known as “face value” or “par value.” It is important in business and finance as it’s essentially the amount the issuer is borrowing that they must repay to the bondholder at maturity. It is also used to calculate the bond’s periodic coupon payments which are a percentage of the Original Face. Therefore, it significantly affects the total investment cost, return, and yield. Understanding the term helps investors and borrowers in making informed financial decisions and in assessing the worth of a financial instrument.
Explanation
The Original Face is a relevant concept especially in the field of finance and mortgage-backed securities. This term refers to the total amount of principal value of a mortgage or collection of mortgages at the time they were initially originated. The principal value refers to the amount that the borrower is obligated to pay back before interest charges are factored into the equation. Therefore, the Original Face offers a snapshot of the aggregate potential returns from these mortgages, excluding the accrued interest, at the inception of these financial instruments.The primary use of the Original Face value is to calculate potential return on investment and assess risk exposure. Investors seeking to diversify their portfolio by acquiring mortgage-backed securities need to know the Original Face value to accurately estimate potential profit and to manage their risk profile. It enables them to project what income might be generated by these securities over the life of the associated loans, especially in scenarios where interest rates fluctuate or in case the borrowers prepay their loans. Importantly, it provides integral data points required by an investor to make informed investment decisions and helps in calculating other relevant metrics like yield, duration, and average life of mortgage-backed securities.
Examples
Original Face is a finance term that refers to the total value or principal amount of a mortgage-backed security (MBS) at the time of issuance, or the total amount of debt issued in a securitization before any repayments have been made. Here are three real-world examples of this:1. Mortgage-Backed Securities: When a financial institution like Freddie Mac or Fannie Mae issues a mortgage-backed security, the original face value represents the total principal of the pool of mortgages packaged within that security. For instance, if they issue an MBS composed of 1,000 residential mortgages each with a value of $200,000, the original face value on the MBS would be $200 million. 2. Corporate Bonds: A corporation can issue bonds as a way of raising capital. When they first issue this bond, it has its original face value. For example, if a company issues 5000 bonds at a face value of $1000 each, the original face value of these corporate bonds would be $5 million.3. Government Treasury Bonds: When a government issues treasury bonds to help fund its operations, the original face value is the principal amount it will repay at maturity. If the U.S government issues a Treasury bond with a face value of $10,000, for instance, that would be its original face value. The treasury later decides how much interest to offer over the life of the bond, but the original face value remains the same.
Frequently Asked Questions(FAQ)
What does the term Original Face mean in finance?
Original Face refers to the total value of a mortgage-backed security (MBS) at the time it is issued.
How does Original Face value change over time?
The Original Face value doesn’t change because it represents the total amount of the mortgages within the MBS when it was initially created. However, the current face value may decrease over time as the principal balance of the mortgages gets paid down.
Does Original Face affect the value of a Mortgage-Backed Security?
Original Face is the initial measure of the value of the MBS. It does not directly impact the price or market value of the security, but it provides an indication of its size.
How is Original Face different from Current Face or Remaining Face?
Original Face represents the total principal value of mortgages within a MBS at the time of issuance. Current Face or Remaining Face represents the outstanding principal balance at any given time after issuance.
Is the Original Face value the same as the purchase price of a Mortgage-Backed Security?
No, the purchase price of a MBS is dictated by market conditions and may be higher or lower than the Original Face value. The Original Face just represents the total underlying value of the mortgages at issuance.
What factors impact the Original Face value of a MBS?
The Original Face value of a MBS is determined by the total value of the mortgages that make up the security at the time of issue. It does not change over time unlike the Current Face value.
How can one identify the Original Face value from an MBS prospectus?
The Original Face value is typically included in the MBS prospectus or offering documents under the terms and conditions of the security.
In a declining mortgage rate environment, would Original Face affect the prepayment risk of a MBS?
The Original Face value itself does not influence prepayment risk. However, if interest rates fall, homeowners might refinance their loans, which could lead to a faster decrease of the Remaining Face relative to the Original Face.
Related Finance Terms
- Par Value: This is the nominal or face value of a bond, share of stock, or a coupon as indicated on the certificate. It is the value at which a bond or security is issued.
- Amortization: This refers to the process of gradually reducing a debt through installment payments of principal and interest over a set period of time.
- Discount Rate: In finance, this is the rate of return used to discount future cash flows back to their present value. This rate often serves as an indicator of the minimum return required by investors.
- Yield to Maturity (YTM): This is a concept for bond investors that estimates the average annual return that would be received if a bond were held until it matures.
- Collateralized Mortgage Obligation (CMO): This a type of mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The Original Face is an important characteristic considered in CMOs.
