Authorized denominations: Overview, definition, and example
What are authorized denominations?
Authorized denominations refer to the specific denominations or values in which securities, such as bonds or notes, can be issued, bought, or traded. These denominations are pre-established and agreed upon by the issuing entity, typically reflecting a standard value in the financial markets. The term ensures that transactions related to these securities occur in units that are legally recognized and acceptable by the issuer and investors.
For example, a company may issue bonds in authorized denominations of $1,000, meaning that each bond must be purchased or sold in increments of $1,000.
Why are authorized denominations important?
Authorized denominations are important because they provide clarity and consistency in the issuance and trading of securities. They help standardize transactions, ensuring that both issuers and investors understand the value of each unit and how it fits within the overall offering. This standardization also facilitates market liquidity, making it easier for investors to buy, sell, or trade securities without confusion over pricing or value. Furthermore, having clear denominations helps issuers maintain control over the structure of their financial products.
Understanding authorized denominations through an example
Imagine a company issues bonds worth $100 each but specifies that the authorized denomination for purchasing the bonds is $1,000. This means that investors must buy the bonds in multiples of $1,000 (e.g., 10 bonds for $10,000). This structure ensures that transactions are aligned with the issuer's intended denomination standards, and the bonds are traded consistently.
In another example, a government may issue treasury notes in authorized denominations of $5,000, which means that retail investors must buy at least $5,000 worth of notes, while institutional investors may buy larger amounts, all in multiples of $5,000.
An example of an authorized denominations clause
Here’s how an authorized denominations clause might appear in a contract:
“The securities issued under this Agreement shall be in authorized denominations of [X] units, and each transaction involving these securities must be in increments of the authorized denomination.”
Conclusion
Authorized denominations ensure that the issuance and trading of securities follow standardized units, making transactions smoother and more predictable for both issuers and investors. By specifying authorized denominations in contracts or offering documents, issuers can control the structure of their securities and maintain clarity in financial markets.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.