Introduction
Original Face, also known as Original Face Value, refers to the par value or principal amount of a bond or mortgage-backed security (MBS) at the time it is issued. It represents the total value of the underlying loans or bonds before any principal repayments are made. This figure is crucial in determining initial cash flows, interest calculations, and pricing of fixed-income securities.
Over time, especially in the case of amortising securities like MBS, the actual outstanding value of the security decreases as borrowers make repayments. However, the original face remains a reference point for investors, analysts, and portfolio managers.
What Is Original Face Value?
The Original Face is the total principal amount of a debt instrument at issuance. For a single bond, it is the face value (usually ₹1,000 or ₹100,000), but for instruments like mortgage-backed securities (MBS) or asset-backed securities (ABS), it represents the sum of all underlying loan principals.
Example:
An MBS backed by 500 home loans of ₹10 lakh each would have an original face value of ₹50 crore. Over time, as mortgage borrowers repay principal, the outstanding balance declines, but the original face remains unchanged.
Importance of Original Face in Bond Markets
- Pricing: Bonds and MBS are priced as a percentage of their original face value (e.g., 98.50% of face).
- Yield Calculations: Original face is used to calculate yield, interest income, and total return.
- Amortisation Tracking: Helps monitor how much of the original principal has been repaid.
- Benchmarking: Used to compare securities with different structures and payment schedules.
Example:
- A bond issued at ₹1 crore (original face) may have a current face of ₹60 lakh after four years of amortisation.
- In instruments like MBS, monthly mortgage repayments reduce the current face value, even though the original face remains constant for reference.
Original Face in Mortgage-Backed Securities (MBS)
- In India, MBS and securitised loan pools issued by housing finance companies or NBFCs use original face as a core value metric. It is the starting point for calculating investor payouts, interest, and risk exposure.
- As borrowers pay EMIs (which include principal), the MBS balance declines. Investors in the support or companion tranches monitor this closely to assess cash flow risks and prepayment trends.
Impact of Prepayments on Original Face
While prepayments (early repayment of loans) do not change the original face, they accelerate the decline of the current face value. For investors, faster amortisation reduces future interest income, even though the bond was originally purchased based on the original face.
This is particularly important for:
- Amortising Bonds
- Mortgage-Backed Securities (MBS)
- Asset-Backed Securities (ABS)
Why Original Face Matters to Investors
1. Determines Initial Investment Size
- Investors often buy bonds in lots based on face value. For example, ₹10 lakh original face at 98% price = ₹9.8 lakh cost.
2. Used in Performance Reporting
- Portfolio performance and returns are often expressed as a percentage of the original face.
3. Helps in Risk Assessment
- Large original face amounts may indicate higher exposure or diversification across loan pools.
4. Benchmark for Structured Products
- Tranche paydowns in CMOs and MBS are calculated based on the original structure of the security.
Conclusion
The Original Face value is a fundamental concept in the fixed-income and securitisation markets, representing the starting principal of a bond or mortgage-backed instrument. While it does not change over time, it serves as a critical benchmark for calculating returns, tracking repayments, and comparing different securities.
Understanding the distinction between original face and current face is especially important for investors in amortising instruments, such as MBS, ABS, and structured debt products. In India's evolving bond and securitisation market, the concept of original face continues to play a vital role in investment evaluation and portfolio management.
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