## f8-valuation-of-debt-securities-at-both-market-and-nominal-value

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### Background
- Debt securities have both a market value and a nominal value; both can be used for presenting securities statistics.
- BPM6 (para. 7.30) states nominal value is “the amount that the debtor owes to the creditor”.
- Nominal value:
  - Can usually be established by reference to contract terms between debtor and creditor.
  - Is frequently used to construct debt ratios in vulnerability and sustainability analysis for policy purposes (notably for government debt—PSDSG requires nominal valuation and the European Maastricht debt concept focuses on face value).
  - Is analytically useful during periods of financial and economic crisis where price distortions may significantly influence the net international investment position (IIP).
  - Is relevant in periods of high volatility, falling macroeconomic projections, or changing interest rate environment.
- HSS (para. 5.41) states both values provide useful information for monetary policy, fiscal policy, and financial stability analysis.
- Macroeconomic statistics on holdings of securities (e.g., cross-border investments by investor country) are compiled using market values; liabilities of the issuer may be presented using nominal valuation (for external debt).
- Open issue: whether nominal valuation has strong analytical value for both assets and liabilities; nominal value is particularly relevant from the debtor perspective.

### Current international standards and normative guidance
- Market prices are the general valuation basis in international accounts (BPM6, para. 3.67) and national accounts (2008 SNA, para. 2.60).
- 2008 SNA (para. 3.157b) describes nominal value as “the amount the debtor owes to the creditor, which comprises the outstanding principal amount including any accrued interest”.
- BPM6 defines nominal value as sum of funds originally advanced, plus subsequent advances, plus accrued interest, less repayments; nominal value in domestic currency of an instrument denominated in foreign currency includes holding gains or losses arising from exchange rate changes (BPM6, para. 3.88 (b)).
- Manuals’ recommendations:
  - HSS: present debt securities at market value and express liability positions also in nominal value; holdings recorded at market value (HSS, para. 5.40–5.42).
  - BPM6: encourages nominal value as a supplementary item; EDS Guide recommends both valuations.
  - GFSM 2014 and PSDSG: recommend debt instruments be valued at nominal value while debt securities be valued at market value as well; traded debt securities should be valued at market value and, for liabilities, at nominal value as well (GFSM 2014, para. 7.27–7.241).
  - MFSMCG: recommends nominal value as a memorandum item for debt security liabilities and highlights analytical usefulness as the legal liability from the debtor viewpoint (para. 5.106 and para. 5.121).

### Shortcomings and practical compilation concerns
- Default valuation method is market value per 2008 SNA and BPM6; guidance on nominal value is encouraged but weak.
- 2008 SNA (para. 3.155) acknowledges usefulness of supplementary nominal values but lacks a clear definition comparable to BPM6 para. 3.88 (b).
- EDS Guide (para. 15.18) observations:
  - Nominal value helps identify debtor’s maximum exposure and assess liquidity risk.
  - Market value and spreads indicate market view on borrower’s ability to meet obligations and influence borrowing plans.
  - In low valuation/low liquidity markets, market value can swing sharply; nominal value remains unaffected and offers particular analytical value.
- Inconsistencies across economies arise because many disseminate debt securities on a single valuation basis (either nominal or market), impairing cross-country and macroeconomic comparisons (example noted: World Bank’s Quarterly External Debt Statistics Database uses a single valuation basis).
- Practical compilation challenges: lack of detailed presentation guidance, table design, and explicit calculation procedures in SNA/BPM.

### Options considered and Committee decision
- Options discussed:
  - Option 1 — Do nothing: retain current weak mentions of nominal value in SNA/BPM; rely on existing guidance in other manuals (EDS Guide, HSS, PSDSG, ESA 2010 para. 7.39). Outcome: continued heterogeneity in published nominal-value data across countries and frameworks.
  - Option 2 — Strengthen guidance: supplement EDS Guide guidance using other manuals to enhance nominal-value information for analytical purposes. Decision within Option 2: cover both assets and liabilities at nominal value or concentrate on nominal value of liabilities.
- Committee decision:
  - The IMF Committee on Balance of Payments Statistics members strongly supported Option 2 at the Committee’s October 2020 meeting.

### Committee-agreed actions and recommended compilation scope
- Adopt a supplementary table in BPM7 similar to the EDS Guide framework to reconcile nominal and market valuation of debt securities included in the gross external debt position (see Table 1 in Annex I of source).
- For the 2008 SNA, adopt similar reconciliation tables covering domestic sectors.
- Present debt securities in the table broken down by institutional sector and maturity; keep table at a higher level to reflect compilation challenges.
- Include the proposed table in the section “Additional Analytical Position Data” (pages 313–321 of the BPM6) alongside currency compositions, debt on a remaining maturity basis, and reserve-related liabilities.
- Within the 2008 SNA, add reconciliation tables within Chapter 13 (Balance Sheets) and cross-link with Chapter 26 (The Rest of the World Accounts and Links to the Balance of Payments).
- Scope of compilation:
  - Proposed table should be compiled only for liabilities given higher analytical value for liabilities.
  - Where nominal value of debt security holdings is relevant for the economy, nominal value of total assets in debt securities may be included in the supplementary table next to liabilities.
- Intercompany lending:
  - Compilers could compile data on debt securities used for intercompany lending at nominal value, either within the table or as a supplementary item, in economies heavily impacted by foreign direct investment.
  - Rationale: expanding cross-border direct investment positions, increasing role of special purpose entities (SPEs), and substantial weight of MNEs in some economies warrant attention to intragroup positions and exposures.

### Recommended clarifications, definitions, and calculation guidance
- Adopt the BPM6 definition of nominal value (para. 3.88 (b)) in the SNA for clarity and consistency.
- Add clarification in SNA and BPM on the relationship between nominal and market value, consistent with HSS para. A1.5: “Market value = Nominal value + Cumulative revaluations arising from market price changes”.
- Avoid referring to nominal value in ways that contradict BPM6 para. 3.88 (b).
- Clarify calculation consistent with EDS Guide para. 2.34: “the nominal value of a debt instrument can be calculated by discounting future interest and principal payments at the existing contractual interest rate(s)”.

### Annex — Table on Gross External Debt Position: Debt Securities — Reconciliation of Nominal and Market Value (Table 1) (structure)
- Columns/headings:
  - Nominal Value Position at End of Period
  - Difference with Market value
  - Market Value Position at End of Period
- Institutional sector breakdown (each with Short-term; Long-term):
  - General Government
  - Central Bank
  - Deposit-Taking Corporations, except the Central Bank
  - Other Sectors
  - Other Financial Corporations
  - Nonfinancial Corporations
  - Households and non-profit institutions serving households (NPISHs)
  - Total

### Methodological references and practical valuation guidance (summary)
- Key definitional and valuation citations:
  - BPM6 para. 3.67, 3.84, 3.88 (b), 7.30, 7.54–7.55; 2008 SNA para. 3.155 and para. 13.59–13.61; ESA 2010 para. 7.39.
- Recommended practices from External Debt Statistics (Guide for Compilers and Users):
  - Recommends debt instruments valued at reference date at nominal value and debt securities at market value as well (para. 2.33, 2.34).
  - Conceptual calculation of nominal value by discounting future interest and principal payments at existing contractual interest rate(s).
  - For deep-discount and zero-coupon bonds, use original yield-to-maturity at issuance for nominal valuation.
  - If market price not observable, estimate market value by discounting expected future payments at a market rate (para. 2.49–2.51).
  - When securities have buy-sell spreads, use midpoint for valuation.
- Practical valuation exceptions and rules:
  - Use market prices where active markets exist; if markets closed on balance-sheet date use closest preceding open-market prices (BPM6 para. 3.84).
  - Long-term securities valued at current market prices including accrued interest (the “dirty” price) (2008 SNA para. 13.59).
  - Index-linked securities: value at market price regardless of index nature (2008 SNA para. 13.60).
  - Securities with principal and coupons indexed to a foreign currency: treat as denominated in that foreign currency and convert to domestic currency at the mid-point of rates prevailing on the balance-sheet date (2008 SNA para. 13.61).
  - For debt securities issued at a discount, the discount rate for nominal valuation should be the yield-to-maturity at issuance (External Debt Statistics para. 2.33 footnote 19).

### Analytical implications for policy
- Nominal value is especially useful from the debtor perspective as the outstanding amount owed at any moment; it aids identification of maximum exposure and liquidity-risk assessment (External Debt Statistics para. 2.33; para. 15.18).
- Market value conveys opportunity cost to debtor and creditor, signals market sentiment, creditworthiness, and potential refinancing costs (External Debt Statistics para. 2.33; para. 15.18).
- In low valuation or low-liquidity markets, market values can swing sharply while nominal value remains stable, increasing nominal value’s analytical relevance (External Debt Statistics para. 15.18).
- Increasing availability of credit derivative information (e.g., default swaps and spread options) supplements market information on an entity’s credit standing (External Debt Statistics para. 15.18 footnote 11).

*Prepared by the IMF Committee on Balance of Payments Statistics; inputs from BPM6; External Debt Statistics: Guide for Compilers and Users; 2008 SNA; Handbook on Securities Statistics; GFSM; PSDSG; MFSMCG; ESA 2010.*

### SECTION I: THE ISSUE

### f8-valuation-of-debt-securities-at-both-market-and-nominal-value - SECTION I: THE ISSUE

### Background
- Debt securities have a market value as well as a nominal value; both can be used for presenting securities statistics.
- BPM6 (para. 7.30) indicates that “the nominal value of a debt instrument is a useful measure of value from the viewpoint of the debtor because, at any moment in time, it is the amount that the debtor owes to the creditor”.
- Nominal value:
  - Can usually be established by reference to the terms of a contract between debtor and creditor.
  - Is frequently used to construct debt ratios in vulnerability and sustainability analysis for policy purposes (notably for government debt—PSDSG requires nominal valuation and the European Maastricht debt concept focuses on face value).
  - Is analytically useful during periods of financial and economic crisis where price distortions may significantly influence the net international investment position (IIP).
  - Is relevant in periods of high volatility, falling macroeconomic projections, or changing interest rate environment.
- The Handbook on Securities Statistics (HSS, para. 5.41) states that “both values provide useful information from the perspective of monetary policy, fiscal policy, and financial stability analysis”.
- Macroeconomic statistics on holdings of securities (e.g., cross-border investments by investor country) are compiled using market values; liabilities of the issuer may be presented using nominal valuation (for external debt).
- Open question: whether nominal valuation of debt securities has strong analytical value for both assets and liabilities; nominal value is particularly relevant from the debtor perspective, leading some to emphasize liabilities, while others emphasize value for assets as well.

### Current International Standards to Treat the Issue
- Market prices are the general basis for valuation in the international accounts (BPM6, para. 3.67) and in the national accounts (2008 SNA, para. 2.60).
- The 2008 SNA (para. 3.157b) describes nominal value as “the amount the debtor owes to the creditor, which comprises the outstanding principal amount including any accrued interest”.
- BPM6 clarifies nominal value as the sum of funds originally advanced, plus subsequent advances, plus accrued interest, less repayments (including payments covering accrued interest). Nominal value in domestic currency of an instrument denominated in foreign currency includes holding gains or losses arising from exchange rate changes (BPM6, para. 3.88 (b)).
- Manuals’ recommendations:
  - HSS: debt securities should be presented at market value and liability positions also expressed in nominal value; holdings should be recorded at market value (HSS, para. 5.40–5.42).
  - BPM6 encourages nominal value for debt securities as a supplementary item; EDS Guide recommends both valuations.
  - GFSM 2014 and PSDSG recommend debt instruments be valued at nominal value while debt securities be valued at market value as well; traded debt securities should be valued at market value and, for liabilities, at nominal value as well (GFSM 2014, para. 7.27–7.241).
  - MFSMCG (para. 5.106 and para. 5.121) recommends nominal value as a memorandum item for debt security liabilities and clarifies its analytical usefulness as the legal liability from the debtor viewpoint.

### Concerns and Shortcomings in Current Standards
- Basic valuation method for debt securities is market value per 2008 SNA and BPM6; nominal value is encouraged but guidance is weak.
- 2008 SNA acknowledges usefulness of supplementary nominal values (2008 SNA, para. 3.155) but lacks a clear definition comparable to BPM6 para. 3.88 (b).
- EDS Guide (para. 15.18) recommends:
  - Debt instruments valued at reference date at nominal value; debt securities at market value as well.
  - Nominal value helps identify debtor’s maximum exposure and assess liquidity risk.
  - Market value and spreads indicate market view on borrower’s ability to meet obligations and influence borrowing plans.
  - In low valuation/low liquidity markets, market value can swing sharply; nominal value remains unaffected and provides particular analytical value.
- Inconsistencies arise because most economies disseminate debt securities data on a single valuation basis (either nominal or market) — e.g., World Bank’s Quarterly External Debt Statistics Database — leading to cross-country and macroeconomic analysis inconsistencies.
- Practical compilation complexities and lack of detailed presentation guidance (no table design or detailed explanations in SNA/BPM) are noted.

### Issues for Discussion (Options considered)
- Two options considered:
  - Option 1 — Do nothing: leave nominal value for debt securities as currently (weakly) mentioned in SNA and BPM; rely on existing guidance in other manuals (EDS Guide, HSS, PSDSG, ESA 2010 para. 7.39). Outcome: some countries may publish nominal-value data, but content and format may differ across countries and statistical frameworks.
  - Option 2 — Strengthen guidance: use existing EDS Guide guidance supplemented by other manuals to strengthen available information on nominal value for analytical purposes. A decision within this option: whether to cover both assets and liabilities at nominal value or concentrate on nominal value of liabilities.

### Outcomes (Committee decisions and recommendations)
- The IMF Committee on Balance of Payments Statistics (Committee) members strongly supported Option 2 at the Committee’s October 2020 meeting.
- Agreed actions:
  - Adopt a supplementary table in BPM7 similar to the one in the EDS Guide (see Table 1 in Annex I) to provide a framework reconciling nominal and market valuation of debt securities included in the gross external debt position.
  - For the 2008 SNA, adopt similar tables covering domestic sectors.
  - Present debt securities in the table broken down by institutional sector and maturity; table remains at a higher level to reflect practical compilation challenges.
  - Include the proposed table in the section “Additional Analytical Position Data” (pages 313–321 of the BPM6) alongside currency compositions, debt on a remaining maturity basis, and reserve-related liabilities.
  - Within the 2008 SNA, add reconciliation tables within Chapter 13 (Balance Sheets) and cross-link with Chapter 26 (The Rest of the World Accounts and Links to the Balance of Payments).
- Scope of compilation:
  - Proposed table should be compiled only for liabilities given higher analytical value for liabilities.
  - Where nominal value of debt security holdings is relevant for the economy, nominal value of total assets in debt securities may be included in the supplementary table next to liabilities.
- Intercompany lending:
  - Compilers could compile data on debt securities used for intercompany lending at nominal value, either within the table or as a supplementary item, in economies heavily impacted by foreign direct investment.
  - Rationale: expanding cross-border direct investment positions, increasing role of special purpose entities (SPEs), and substantial weight of MNEs in some economies warrant attention to intragroup positions and exposures.
- Recommended clarifications and definitions:
  - Adopt the BPM6 definition of nominal value (para. 3.88 (b)) in the SNA for clarity and consistency.
  - Add clarification in SNA and BPM on the relationship between nominal and market value to enhance analytical value, in line with HSS para. A1.5: “Market value = Nominal value + Cumulative revaluations arising from market price changes”.
  - Avoid referring to nominal value in a manner that might contradict BPM6 para. 3.88 (b); include clarification on calculation consistent with EDS Guide para. 2.34: “the nominal value of a debt instrument can be calculated by discounting future interest and principal payments at the existing contractual interest rate(s)”.

### Annex — Table on Gross External Debt Position: Debt Securities — Reconciliation of Nominal and Market Value (Table 1)
- Table structure (by institutional sector and maturity) includes columns/headings:
  - Nominal Value Position at End of Period
  - Difference with Market value
  - Market Value Position at End of Period
- Institutional sector breakdown in table:
  - General Government: Short-term; Long-term
  - Central Bank: Short-term; Long-term
  - Deposit-Taking Corporations, except the Central Bank: Short-term; Long-term
  - Other Sectors: Short-term; Long-term
  - Other Financial Corporations: Short-term; Long-term
  - Nonfinancial Corporations: Short-term; Long-term
  - Households and non-profit institutions serving households (NPISHs): Short-term; Long-term
  - Total: Short-term; Long-term

_Prepared by Mr. John Verrinder (Eurostat) and Ms. Paula Menezes (Portugal), with inputs from Mr. Mher Barseghyan (Armenia), Ms. Pujiastuti Abassuni (Indonesia), Ms. Gabriele Semeraro (Italy), Mr. Patrick McGuire, and Mr. Branimir Gruic (BIS)._

### Annex II. Methodological References

### Annex II. Methodological References

### Valuation principles and definitions (BPM6; 2008 SNA; ESA 2010)
- BPM6 para. 3.67: Market prices refer to current exchange value, that is, the values at which goods and other assets, services, and labors, are exchanged or else could be exchanged for cash. Market prices are the basis for valuation in the international accounts.
- BPM6 para. 3.84: Positions of financial assets and liabilities should, in general, be valued as if they were acquired in market transactions on the balance sheet reporting date. If financial markets are closed on the balance sheet date, the market prices to be used are those that prevailed on the closest preceding date when the markets were open.
- BPM6 para. 3.88 (b): Nominal value refers to the outstanding amount the debtor owes to the creditor, which is composed of the outstanding principal amount including any accrued interest. The nominal value reflects the sum of funds originally advanced, plus any subsequent advances, plus any interest that has accrued, less any repayments (which includes any payments covering interest accrual).
- BPM6 para. 3.88: Nominal value in domestic currency of a debt instrument denominated in foreign currency also includes holding gains or losses arising from exchange rate changes.
- 2008 SNA para. 3.155: Debt securities have a current market value as well as a nominal value, and for some purposes supplementary data on the nominal values of positions of debt securities may be useful.
- ESA 2010 para. 7.39:
  - Nominal valuation reflects the sum of funds originally advanced, plus any subsequent advances, less any repayments, plus any accrued interest.
  - (a) The nominal value in domestic currency of a financial instrument denominated in foreign currency includes holding gains or losses arising from movements in exchange rates. The value of financial instruments denominated in foreign currency should be converted into the national currency at the market exchange rate prevailing on the date to which the balance sheet relates; this rate should be the mid-point between the buying and the selling spot rates for currency transactions.
  - (b) For instruments like debt securities linked to a narrow index, the nominal value can also include holding gains or losses arising from movements in the index.
  - (c) At any specific point in time, market value may deviate from nominal value due to revaluations arising from market price changes.
  - (d) The basic equation: market value = nominal value + revaluations arising from market price changes.

### Recommended valuation practices and symmetry across frameworks
- External Debt Statistics: Guide for Compilers and Users para. 2.33 and para. 2.34:
  - Recommends that debt instruments are valued at the reference date at nominal value, and, for debt securities, at market value as well.
  - Conceptually, nominal value can be calculated by discounting future interest and principal payments at the existing contractual interest rate(s).
  - For deep-discount and zero-coupon bonds, the discount rate should be the original yield-to-maturity at issuance (the yield used to calculate accrued interest).
  - A single discount rate is usually used; example: at a rate of discount of 10 percent, the discount factor for payments one year hence is 0.909 (or 1/(1 + 0.1)) and for payments two years hence is 0.826 (or 1/(1 + 0.1)^2).
- External Debt Statistics para. 2.48–2.51:
  - Recommends that debt securities be valued at both nominal and market value.
  - Where market price is not readily observable, the present value of expected future payments discounted at a market rate of interest can estimate market value.
  - For unlisted securities, accounting or regulatory prices might be used (less preferable).
  - For deep-discount or zero-coupon bonds, issue price plus amortization of the discount could be used when no market price exists.
  - If arrears are traded on secondary markets, a separate market value could be established.
  - When securities are quoted with a buy-sell spread, the midpoint should be used to value the instrument.
- BPM6 para. 7.30 and 9.33:
  - Basic valuation method for debt securities is market value; nominal value is encouraged as a supplementary item.
  - Nominal valuation is used for positions in nonnegotiable instruments (loans, deposits, other accounts receivable/payable); when transactions in these instruments occur they are valued at market prices. To reconcile market-valued transactions with nominal-valued positions, sellers record other price changes equal to the difference between nominal and transaction value and buyers record the opposite amount.
- BPM6 para. 7.54–7.55:
  - Recommends valuation of debt securities in gross external debt position at both nominal and market value.
  - Table 7.16 provides a framework for reconciling nominal and market valuation of debt securities broken down by institutional sector and maturity and presented in absolute amounts in the same unit of account used for the gross external debt position.
- Guide para. 4.5:
  - Recommends that both nominal and market values be provided for debt securities as memorandum items to Table 4.1 to reduce inconsistencies in macroeconomic analysis and cross-country comparisons.

### Practical valuation methods and exceptions
- Market prices are the basis where active markets exist; when markets are closed use closest preceding open-market prices (BPM6 para. 3.84).
- For long-term securities (2008 SNA para. 13.59): value at current market prices including accrued interest (the “dirty” price). This applies to bonds with regular interest and to deep-discount or zero-coupon bonds.
- Index-linked securities: value at market price regardless of the nature of the index (2008 SNA para. 13.60).
- Securities with both principal and coupons indexed to a foreign currency: treat as denominated in that foreign currency and convert to domestic currency at the mid-point of rates prevailing on the balance sheet date (2008 SNA para. 13.61).
- Where market price is not observable, estimate market value by discounting expected future payments at a market rate (External Debt Statistics para. 2.49; Box 2.3 referenced).
- For debt securities issued at a discount, discount rate for nominal valuation should be the yield-to-maturity at issuance (External Debt Statistics para. 2.33 footnote 19).

### Analytical implications and policy relevance
- Nominal value is analytically useful from debtor perspective because it is the amount the debtor owes at any moment and can help identify maximum exposure and assess liquidity risk (External Debt Statistics para. 2.33; para. 15.18).
- Market value provides the opportunity cost to both debtor and creditor and signals market sentiment, creditworthiness, and potential refinancing costs (External Debt Statistics para. 2.33; para. 15.18).
- For countries with low valuation or low-liquidity markets, market values can swing sharply; nominal value remains unaffected and is thus of particular analytical value in such circumstances (External Debt Statistics para. 15.18).
- Increasingly, credit derivative information (e.g., default swaps and spread options) provides market information on an entity’s credit standing (External Debt Statistics para. 15.18 footnote 11).

### Sectoral and statistical reporting guidance (HSS; GFSM; PSDS; MFSMCG)
- Handbook on Securities Statistics (HSS) para. 5.40–5.42:
  - Recommends that debt securities be presented at market value and that liability positions be expressed in nominal value. Debt securities issues should be recorded at both market and nominal value; holdings should be recorded at market value.
- GFSM and PSDS:
  - Recommend debt instruments be valued at nominal value, while debt securities should be valued at market value as well. Debt securities traded in organized markets should be valued at market value and, for liabilities, at nominal value as well (GFSM para. 7.27–7.241).
- MFSMCG para. 5.103–5.121:
  - Provides information on valuation; para. 5.106 indicates nominal value is recommended as a memorandum item for debt security liabilities to support consistency with debt measures (reference to EDS and PSDS Guides).

- The Annex 1 in the source illustrates relationships between market value and nominal value for positions in debt securities and the recording of accrual and payment of interest for different types of debt securities.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/approved-guidance-notes/f8-valuation-of-debt-securities-at-both-market-and-nominal-value.pdf_