## SECTION I: THE ISSUE ## Source details **Canonical URL:** [SECTION I: THE ISSUE](https://www.imf.org/-/media/files/data/statistics/bpm6/fitt/f-8-valuation-debt-securities-both-market-nominal-value.pdf) ## Other formats - [Markdown version](/-/media/files/data/statistics/bpm6/fitt/f-8-valuation-debt-securities-both-market-nominal-value.pdf.md) - [Structured JSON version](/-/media/files/data/statistics/bpm6/fitt/f-8-valuation-debt-securities-both-market-nominal-value.pdf.json) --- ### Background - Debt securities have a market value as well as a nominal value; both values can be used for presenting securities statistics. - BPM6 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” (BPM6, para. 7.30). - The Public Sector Debt Statistics Guide (PSDSG) requires nominal valuation for government debt; the European Maastricht debt concept focuses on face value. - HSS states that “both values provide useful information from the perspective of monetary policy, fiscal policy, and financial stability analysis” (HSS, para. 5.41). - 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. - Is particularly relevant during periods of financial and economic crisis and periods of high volatility, when market prices may be massively distorted and may produce counter-intuitive movements in net IIP. - Divergence between market and nominal value over time is analytically valuable (EDS Guide, para. 7.55). - Nominal valuation is used for positions in currency and deposits and in nonnegotiable instruments (loans and other accounts receivable/payable) (BPM6, para. 7.40–7.44; 2008 SNA, para. 13.57, 13.66, and 13.84). - When transactions in these instruments occur, they are valued at market prices; transaction prices often are less than nominal values because the market price reflects liquidity, interest rate environment changes, and changes in default risk (BPM6, para. 8.12; para. 9.33 describes recording of other price changes to account for differences). ### Current international standards and guidance - 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; nominal value in domestic currency of a foreign-currency instrument also includes holding gains or losses from exchange rate changes (BPM6, para. 3.88 (b)). - Manuals recommending or encouraging nominal valuation as supplementary or standard items: - HSS: recommends presenting debt securities at market value and liability positions also expressed in nominal value (HSS, para. 5.40–5.42). - BPM6: encourages nominal value as a supplementary item. - EDS Guide: recommends both valuations be used. - GFSM 2014 and PSDSG: recommend debt instruments valued at nominal value; debt securities valued at market value and, for liabilities, also at nominal value (GFSM 2014, para. 7.27–7.241). - MFSMCG (paras. 5.106 and 5.121): recommends nominal value as a memorandum item for debt security liabilities and clarifies nominal value as an analytically useful measure of legal liability from the debtor viewpoint. ### Concerns and shortcomings in current standards - The basic valuation method for debt securities is market value in 2008 SNA and BPM6, while nominal value is encouraged only as supplementary; the SNA lacks a clear definition of nominal value comparable to BPM6, para. 3.88 (b). - The method of valuing financial assets and liabilities might depend on the focus of analysis (EDS Guide, para. 15.18): - Recommends debt instruments valued at reference date at nominal value, and debt securities also at market value. - Nominal value helps identify the debtor’s maximum exposure to assess liquidity risk. - Market value and spreads provide market view on borrower’s ability to meet obligations and influence borrowing plans. - For economies with low valuation or low-liquidity markets, sudden swings in market sentiment can sharply change market value of external debt; nominal value is unaffected by such swings and is therefore of particular analytical value in those circumstances. - Many economies disseminate debt securities data only on a single valuation basis (either nominal or market value); inconsistencies may arise in macroeconomic analysis and cross-country comparisons. ### Issues for discussion and options considered - Two options considered for guidance in SNA and BPM: - Option 1: Do nothing—leave nominal value for debt securities weakly mentioned in SNA and BPM, rely on existing guidance in other manuals (EDS Guide, HSS, PSDSG, ESA 2010 para. 7.39 for European countries). Result: content and format may differ across countries and between national accounts and external sector statistics. - Option 2: Strengthen guidance using existing EDS Guide material supplemented by other manuals; decision required on whether to cover both assets and liabilities at nominal value or concentrate on liabilities. - Practical compilation aspects are not covered in the note; nominal valuation raises issues regarding data sources and isolating accrued interest, and its relation to amortized cost in financial statements (footnote). ### Outcomes and recommended approach - Recommendation: Adopt Option 2—use the existing guidance in the EDS Guide, supplemented by HSS, MFSMCG, GFSM 2014, and PSDSG, to strengthen available information on nominal value for analytical purposes. - Proposal elements: - Adopt a supplementary table in BPM7 similar to the EDS Guide reconciliation table (see Table 1 in Annex I) to reconcile nominal and market valuation of debt securities included in gross external debt. - For the 2008 SNA, adopt similar tables covering domestic sectors; place reconciliation tables in BPM6 “Additional Analytical Position Data” section and in SNA Chapter 13 (Balance Sheets) cross-linked with Chapter 26 (The Rest of the World Accounts and Links to the Balance of Payments). - Present debt securities in the table broken down by institutional sector and maturity; keep the table at a higher level (not a full breakdown of all differences) to reflect practical compilation challenges. - Recommended that the proposed table be compiled only for liabilities, as the level of detail aligns with the debtor approach. - Where holdings at nominal value of assets are relevant for an economy, compile nominal value of total assets in debt securities as a supplementary item in the IIP. - Adopt the BPM6 definition of nominal value (para. 3.88 (b)) in the SNA for clarity and consistency. - Add clarification on the relationship between nominal and market value in line with HSS, para. A1.5: “Market value = Nominal value + Cumulative revaluations arising from market price changes.” - Avoid interpretations of nominal value that contradict BPM6, para. 3.88 (b); clarify calculation as per 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)”. - Compile data on debt securities used for intercompany lending (direct investment/intercompany lending) at nominal value where economically significant—either as a further breakdown in the table or as a supplementary item outside the table. - FITT and Balance of Payments Task Team (BPTT) majority supported strengthening guidance in BPM6 and 2008 SNA and introducing a supplementary reconciliation table for liabilities, citing analytical importance. ### Specific proposed deliverables and scope choices - Proposed supplementary reconciliation table (Annex I, Table 1: Gross External Debt Position: Debt Securities — Reconciliation of Nominal and Market Value) structure highlights: - Rows by institutional sector: 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. - Each sector broken down by Short-term and Long-term. - Columns: Nominal Value Position at End of Period; Difference with Market value; Market Value Position at End of Period. - Compilation recommendation: table to be completed for liabilities only, unless nominal value of assets is analytically relevant for a given economy. ### Definition of nominal value (paras. 3.88; 2.34; ESA 2010) - Para. 3.88: "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." - 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)." - "Nominal value in domestic currency of a debt instrument denominated in foreign currency also includes holding gains or losses arising from exchange rate changes." (para. 3.88) - Para. 2.34: nominal value comprises outstanding principal amount, including any accrued interest, and "reflects the value of the debt at creation plus any subsequent economic flows, such as transactions (e.g., repayment of principal), valuation changes (including exchange rate and other valuation changes other than market price changes), and any other changes." - ESA 2010 (para. 7.39) clarifications: - (a) "The nominal value in domestic currency of a financial instrument denominated in foreign currency includes holdings gains or losses arising from movements in exchange rates." - (b) "For financial 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, the market value of a financial instrument may deviate from its nominal value due to revaluations arising from market price changes." - (d) "Thus, the following basic equation applies to positions: market value = nominal value + revaluations arising from market price changes." ### Valuation guidance for debt securities and other instruments (paras. 7.30; 2.33; 2.48–2.51; 5.40) - Primary recommendation: "Whereas the basic valuation method for debt securities is the market value, the nominal value is encouraged as a supplementary item." (para. 7.30) - Para. 2.33: "The Guide recommends that debt instruments are valued at the reference date at nominal value, and, for debt securities, at market value as well." - Rationale: "The nominal value of a debt instrument is a useful measure of value from the viewpoint of the debtor, because at any moment, it is the amount that the debtor owes to the creditors." (para. 7.30; para. 2.33) - Para. 2.48: "The Guide recommends that debt securities be valued at both nominal and market value." - Para. 2.49: For debt securities without readily observable market price, "by using a market rate of interest the present value of the expected stream of future payments associated with the security can be used to estimate market value." - Para. 2.50: "If arrears are traded on secondary markets, as sometimes occurs, then a separate market value could be established." - Para. 2.51: "When securities are quoted on markets with a buy-sell spread, the midpoint should be used to value the instrument." - HSS para. 5.40–5.42: the Handbook "recommends that debt securities be presented at market value and that liability positions also be expressed in nominal value" and that "debt securities issues should be recorded at both market and nominal value" while "debt securities holdings should be recorded at market value." ### Use of nominal valuation for nonnegotiable instruments and transactions (paras. 9.33; 2.40) - Para. 9.33: "Nominal valuation is used for positions in nonnegotiable instruments, namely loans, deposits, and other accounts receivable/payable (see paragraphs 7.40–7.44)." - When transactions in these instruments occur, "they are valued at market prices (see paragraph 8.12), with transaction prices often being less than the nominal values, because the market price takes account of the possibility of default." (para. 9.33) - Accounting for inconsistency between market valuation of transactions and nominal valuation of positions: "the seller records other price changes during the period in which the sale occurs, equal to the difference between the nominal and the transaction value and the buyer records an opposite amount as other price changes." (para. 9.33) - Para. 2.40: use of nominal values for loans is influenced by "pragmatic concerns about data availability and the need to maintain symmetry between debtors and creditors" and because "estimating a market price can be somewhat subjective" for non-negotiable loans. Loans that have become negotiable de facto "should be reclassified under debt securities." ### Reconciliation of nominal and market values; presentation (paras. 7.54–7.55; 4.5) - Para. 7.54: "The Guide recommends that debt securities be valued in the gross external debt position at nominal and market value. While the market value takes into account fluctuations in market prices, the nominal value does not." - Para. 7.55: "The divergence in the market and nominal value of debt securities at one moment in time, and over time, is of analytical value. For this reason, Table 7.16 provides a framework for reconciling nominal and market valuation of debt securities included in the gross external debt position." - Presentation guidance (para. 4.5): both nominal and market values should be provided for debt securities, and "debt securities data should be valued in memorandum items to Table 4.1, either at market value if they are presented at nominal value in the table or at nominal value if they are presented at market value in the table." - Note on disclosure practice: "most economies disseminate debt securities data only on a single valuation basis (either nominal or market value basis). As a consequence, inconsistencies may arise in macroeconomic analysis and cross-country data comparisons on external debt." (para. 4.5) ### Valuation and analytical implications for debtors and creditors (paras. 2.33; 15.18; 2008 SNA paras. 3.155; 13.58–13.61) - Analytical perspectives: - Nominal value is "a 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." (para. 2.33) - Market value "provides a measure of the opportunity cost to both the debtor and the creditor" and is "the valuation principle adopted in the BPM6 and 2008 SNA." (para. 2.33) - Para. 15.18: "The debtor will be interested in the nominal value of its debt because at any moment in time it is the amount that the debtor owes to the creditor ... applying nominal values might help identify maximum exposure which can be used to assess liquidity risk." - Market signals: market value and spreads indicate "the market view on its ability to meet debt obligations as well as current market sentiment toward it" and may influence borrowing decisions. (para. 15.18) - 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." - Para. 13.58–13.59: short-term and long-term securities should be valued at current market values; "the price should always be that including accrued interest (the so-called 'dirty' price)." - Para. 13.61: for instruments indexed to a foreign currency, treat them "as if it is denominated in that foreign currency with conversion to domestic currency at the mid-point of the rates prevailing on the date of the balance sheet." ### Debt reduction, sustainability, and projections (paras. 8.6; 14.21) - Para. 8.6: "Debt reduction is defined as the reduction in the nominal value of external debt arising from a debt reorganization arrangement, excluding any payments of economic value made by the debtor to the creditor as part of the arrangement." - Para. 14.21: "External debt sustainability is assessed by undertaking a forward-looking analysis of the evolution of debt burden indicators under baseline and stress test scenarios." Projections of debt dynamics require projecting flows including "those for servicing debt as well as exchange rate changes (given the currency denomination of the debt)." ### Cross-guidance consistency (HSS; GFSM; PSDS; MFSMCG) - HSS: debt securities issues should be recorded at both market and nominal value; holdings at market value. (HSS para. 5.40–5.42) - GFSM and PSDS: recommend debt instruments be valued at nominal value, and debt securities "should be valued at market value and, in the case of liabilities, at nominal value as well." (GFSM paras. 7.27–7.241) - MFSMCG: includes related guidance (paras. 5.103–5.121) and indicates "nominal value is recommended as a memorandum item for debt security liabilities to support consistency with debt measures (and makes reference to the EDS and PSDS Guides)." (para. 5.106) ### Questions for discussion posed to members - 1. Do members agree with the proposal to strengthen the existing guidance in the BPM6 and the 2008 SNA for presenting statistics on stocks of debt securities at nominal value? - 2. Do members agree with the proposal to introduce supplementary tables presenting the reconciliation between debt securities valued at nominal and market value, only for liabilities, similar to the one presented in the EDS Guide? - 3. Do members agree with the proposal to report (in economies where it is relevant) supplementary items on the nominal value of the total amount of assets in debt securities and debt securities used for intercompany lending? - 4. Do members agree with the proposal to further clarify the definition of nominal value by (i) including the arithmetical relationship between market value, nominal value and revaluations; and (ii) indicating that nominal value can be calculated by “discounting future interest and principal payments at the existing contractual interest rate(s)”? *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); material drawn from the External Debt Statistics: Guide for Compilers and Users, BPM6, 2008 SNA, ESA 2010, HSS, GFSM 2014, PSDS, and MFSMCG as cited in the source.* ### SECTION I: THE ISSUE ### SECTION I: THE ISSUE ### Background - Debt securities have a market value as well as a nominal value; both values can be used for presenting securities statistics. - The Balance of Payments and International Investment Position Manual, sixth edition (BPM6) 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” (BPM6, para. 7.30). - The Public Sector Debt Statistics Guide (PSDSG) requires nominal valuation for government debt; the European Maastricht debt concept focuses on face value. - The Handbook on Securities Statistics (HSS) states that “both values provide useful information from the perspective of monetary policy, fiscal policy, and financial stability analysis” (HSS, para. 5.41). - 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. - Is particularly relevant during periods of financial and economic crisis and periods of high volatility, when market prices may be massively distorted and may produce counter-intuitive movements in net IIP. - Divergence between market and nominal value over time is analytically valuable (External Debt Statistics: Guide for Compilers and Users, 2013 (EDS Guide), para. 7.55). - Nominal valuation is used for positions in currency and deposits and in nonnegotiable instruments (loans and other accounts receivable/payable) (BPM6, para. 7.40–7.44; 2008 SNA, para. 13.57, 13.66, and 13.84). - When transactions in these instruments occur, they are valued at market prices; transaction prices often are less than nominal values because the market price reflects liquidity, interest rate environment changes, and changes in default risk (BPM6, para. 8.12; para. 9.33 describes recording of other price changes to account for differences). ### Current international standards and guidance - 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; nominal value in domestic currency of a foreign-currency instrument also includes holding gains or losses from exchange rate changes (BPM6, para. 3.88 (b)). - Manuals recommending or encouraging nominal valuation as supplementary or standard items: - Handbook on Securities Statistics (HSS): recommends presenting debt securities at market value and liability positions also expressed in nominal value (HSS, para. 5.40–5.42). - BPM6: encourages nominal value as a supplementary item. - External Debt Statistics Guide (EDS Guide): recommends both valuations be used. - Government Finance Statistics Manual 2014 (GFSM 2014) and PSDSG: recommend debt instruments valued at nominal value; debt securities valued at market value and, for liabilities, also at nominal value (GFSM 2014, para. 7.27–7.241). - Monetary and Financial Statistics and Compilation Guide (MFSMCG, para. 5.106 and para. 5.121): recommends nominal value as a memorandum item for debt security liabilities and clarifies nominal value as an analytically useful measure of legal liability from the debtor viewpoint. ### Concerns and shortcomings in current standards - The basic valuation method for debt securities is market value in 2008 SNA and BPM6, while nominal value is encouraged only as supplementary; the SNA lacks a clear definition of nominal value comparable to BPM6, para. 3.88 (b). - The method of valuing financial assets and liabilities might depend on the focus of analysis (EDS Guide, para. 15.18): - Recommends debt instruments valued at reference date at nominal value, and debt securities also at market value. - Nominal value helps identify the debtor’s maximum exposure to assess liquidity risk. - Market value and spreads provide market view on borrower’s ability to meet obligations and influence borrowing plans. - For economies with low valuation or low-liquidity markets, sudden swings in market sentiment can sharply change market value of external debt; nominal value is unaffected by such swings and is therefore of particular analytical value in those circumstances. - Many economies disseminate debt securities data only on a single valuation basis (either nominal or market value); inconsistencies may arise in macroeconomic analysis and cross-country comparisons (World Bank’s Quarterly External Debt Statistics Database referenced). ### Issues for discussion and options considered - Two options considered for guidance in SNA and BPM: - Option 1: Do nothing—leave nominal value for debt securities weakly mentioned in SNA and BPM, rely on existing guidance in other manuals (EDS Guide, HSS, PSDSG, ESA 2010 para. 7.39 for European countries). Result: content and format may differ across countries and between national accounts and external sector statistics. - Option 2: Strengthen guidance using existing EDS Guide material supplemented by other manuals; decision required on whether to cover both assets and liabilities at nominal value or concentrate on liabilities. - Practical compilation aspects are not covered in the note; nominal valuation raises issues regarding data sources and isolating accrued interest, and its relation to amortized cost in financial statements (footnote). ### Outcomes and recommended approach - Recommendation: Adopt Option 2—use the existing guidance in the EDS Guide, supplemented by HSS, MFSMCG, GFSM 2014, and PSDSG, to strengthen available information on nominal value for analytical purposes. - Proposal elements: - Adopt a supplementary table in BPM7 similar to the EDS Guide reconciliation table (see Table 1 in Annex I) to reconcile nominal and market valuation of debt securities included in gross external debt. - For the 2008 SNA, adopt similar tables covering domestic sectors; place reconciliation tables in BPM6 “Additional Analytical Position Data” section and in SNA Chapter 13 (Balance Sheets) cross-linked with Chapter 26 (The Rest of the World Accounts and Links to the Balance of Payments). - Present debt securities in the table broken down by institutional sector and maturity; keep the table at a higher level (not a full breakdown of all differences) to reflect practical compilation challenges. - Recommended that the proposed table be compiled only for liabilities, as the level of detail aligns with the debtor approach. - Where holdings at nominal value of assets are relevant for an economy, compile nominal value of total assets in debt securities as a supplementary item in the IIP. - Adopt the BPM6 definition of nominal value (para. 3.88 (b)) in the SNA for clarity and consistency. - Add clarification on the relationship between nominal and market value in line with HSS, para. A1.5: “Market value = Nominal value + Cumulative revaluations arising from market price changes.” - Avoid interpretations of nominal value that contradict BPM6, para. 3.88 (b); clarify calculation as per 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)”. - Compile data on debt securities used for intercompany lending (direct investment/intercompany lending) at nominal value where economically significant—either as a further breakdown in the table or as a supplementary item outside the table. - FITT and Balance of Payments Task Team (BPTT) majority supported strengthening guidance in BPM6 and 2008 SNA and introducing a supplementary reconciliation table for liabilities, citing analytical importance. ### Specific proposed deliverables and scope choices - Proposed supplementary reconciliation table (Annex I, Table 1: Gross External Debt Position: Debt Securities — Reconciliation of Nominal and Market Value) structure highlights: - Rows by institutional sector: 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. - Each sector broken down by Short-term and Long-term. - Columns: Nominal Value Position at End of Period; Difference with Market value; Market Value Position at End of Period. - Compilation recommendation: table to be completed for liabilities only, unless nominal value of assets is analytically relevant for a given economy. ### Questions for discussion posed to members 1. Do members agree with the proposal to strengthen the existing guidance in the BPM6 and the 2008 SNA for presenting statistics on stocks of debt securities at nominal value? 2. Do members agree with the proposal to introduce supplementary tables presenting the reconciliation between debt securities valued at nominal and market value, only for liabilities, similar to the one presented in the EDS Guide? 3. Do members agree with the proposal to report (in economies where it is relevant) supplementary items on the nominal value of the total amount of assets in debt securities and debt securities used for intercompany lending? 4. Do members agree with the proposal to further clarify the definition of nominal value by (i) including the arithmetical relationship between market value, nominal value and revaluations; and (ii) indicating that nominal value can be calculated by “discounting future interest and principal payments at the existing contractual interest rate(s)”? *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).* ### 3.88 for definition of nominal value). ### f-8-valuation-debt-securities-both-market-nominal-value - 3.88 for definition of nominal value) ### Definition of nominal value (paras. 3.88; 2.34; ESA 2010) - Para. 3.88: "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." - 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)." - "Nominal value in domestic currency of a debt instrument denominated in foreign currency also includes holding gains or losses arising from exchange rate changes." (para. 3.88) - Para. 2.34: nominal value comprises outstanding principal amount, including any accrued interest, and "reflects the value of the debt at creation plus any subsequent economic flows, such as transactions (e.g., repayment of principal), valuation changes (including exchange rate and other valuation changes other than market price changes), and any other changes." - 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. Nominal value is not the same as face value." - ESA 2010 clarifications: - (a) "The nominal value in domestic currency of a financial instrument denominated in foreign currency includes holdings gains or losses arising from movements in exchange rates." - (b) "For financial 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, the market value of a financial instrument may deviate from its nominal value due to revaluations arising from market price changes." - (d) "Thus, the following basic equation applies to positions: market value = nominal value + revaluations arising from market price changes." ### Valuation guidance for debt securities and other instruments (paras. 7.30; 2.33; 2.48–2.51; 5.40) - Primary recommendation: "Whereas the basic valuation method for debt securities is the market value, the nominal value is encouraged as a supplementary item." (para. 7.30) - Para. 2.33: "The Guide recommends that debt instruments are valued at the reference date at nominal value, and, for debt securities, at market value as well." - Rationale: "The nominal value of a debt instrument is a useful measure of value from the viewpoint of the debtor, because at any moment, it is the amount that the debtor owes to the creditors." (para. 7.30; para. 2.33) - Para. 2.48: "The Guide recommends that debt securities be valued at both nominal and market value." - Para. 2.49: For debt securities without readily observable market price, "by using a market rate of interest the present value of the expected stream of future payments associated with the security can be used to estimate market value." - Para. 2.50: "If arrears are traded on secondary markets, as sometimes occurs, then a separate market value could be established." - Para. 2.51: "When securities are quoted on markets with a buy-sell spread, the midpoint should be used to value the instrument." - HSS para. 5.40–5.42: the Handbook "recommends that debt securities be presented at market value and that liability positions also be expressed in nominal value" and that "debt securities issues should be recorded at both market and nominal value" while "debt securities holdings should be recorded at market value." ### Use of nominal valuation for nonnegotiable instruments and transactions (paras. 9.33; 2.40) - Para. 9.33: "Nominal valuation is used for positions in nonnegotiable instruments, namely loans, deposits, and other accounts receivable/payable (see paragraphs 7.40–7.44)." - However, when transactions in these instruments occur, "they are valued at market prices (see paragraph 8.12), with transaction prices often being less than the nominal values, because the market price takes account of the possibility of default." (para. 9.33) - Accounting for inconsistency between market valuation of transactions and nominal valuation of positions: "the seller records other price changes during the period in which the sale occurs, equal to the difference between the nominal and the transaction value and the buyer records an opposite amount as other price changes." (para. 9.33) - Para. 2.40: use of nominal values for loans is influenced by "pragmatic concerns about data availability and the need to maintain symmetry between debtors and creditors" and because "estimating a market price can be somewhat subjective" for non-negotiable loans. Loans that have become negotiable de facto "should be reclassified under debt securities." ### Reconciliation of nominal and market values; presentation (paras. 7.54–7.55; 4.5) - Para. 7.54: "The Guide recommends that debt securities be valued in the gross external debt position at nominal and market value. While the market value takes into account fluctuations in market prices, the nominal value does not." - Para. 7.55: "The divergence in the market and nominal value of debt securities at one moment in time, and over time, is of analytical value. For this reason, Table 7.16 provides a framework for reconciling nominal and market valuation of debt securities included in the gross external debt position." - Presentation guidance (para. 4.5): both nominal and market values should be provided for debt securities, and "debt securities data should be valued in memorandum items to Table 4.1, either at market value if they are presented at nominal value in the table or at nominal value if they are presented at market value in the table." - Note on disclosure practice: "most economies disseminate debt securities data only on a single valuation basis (either nominal or market value basis). As a consequence, inconsistencies may arise in macroeconomic analysis and cross-country data comparisons on external debt." (para. 4.5) ### Valuation and analytical implications for debtors and creditors (paras. 2.33; 15.18; 2008 SNA paras. 3.155; 13.58–13.61) - Analytical perspectives: - Nominal value is "a 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." (para. 2.33) - Market value "provides a measure of the opportunity cost to both the debtor and the creditor" and is "the valuation principle adopted in the BPM6 and 2008 SNA." (para. 2.33) - Para. 15.18: "The debtor will be interested in the nominal value of its debt because at any moment in time it is the amount that the debtor owes to the creditor ... applying nominal values might help identify maximum exposure which can be used to assess liquidity risk." - Market signals: market value and spreads indicate "the market view on its ability to meet debt obligations as well as current market sentiment toward it" and may influence borrowing decisions. (para. 15.18) - 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." - Para. 13.58–13.59: short-term and long-term securities should be valued at current market values; "the price should always be that including accrued interest (the so-called 'dirty' price)." - Para. 13.61: for instruments indexed to a foreign currency, treat them "as if it is denominated in that foreign currency with conversion to domestic currency at the mid-point of the rates prevailing on the date of the balance sheet." ### Debt reduction, sustainability, and projections (paras. 8.6; 14.21) - Para. 8.6: "Debt reduction is defined as the reduction in the nominal value of external debt arising from a debt reorganization arrangement, excluding any payments of economic value made by the debtor to the creditor as part of the arrangement." - Para. 14.21: "External debt sustainability is assessed by undertaking a forward-looking analysis of the evolution of debt burden indicators under baseline and stress test scenarios." Projections of debt dynamics require projecting flows including "those for servicing debt as well as exchange rate changes (given the currency denomination of the debt)." ### Cross-guidance consistency (HSS; GFSM; PSDS; MFSMCG) - HSS: debt securities issues should be recorded at both market and nominal value; holdings at market value. (HSS para. 5.40–5.42) - GFSM and PSDS: recommend debt instruments be valued at nominal value, and debt securities "should be valued at market value and, in the case of liabilities, at nominal value as well." (GFSM paras. 7.27–7.241) - MFSMCG: includes related guidance (paras. 5.103–5.121) and indicates "nominal value is recommended as a memorandum item for debt security liabilities to support consistency with debt measures (and makes reference to the EDS and PSDS Guides)." (para. 5.106) --- _Source: https://www.imf.org/-/media/files/data/statistics/bpm6/fitt/f-8-valuation-debt-securities-both-market-nominal-value.pdf_