Effective Value – Definition, Features, Concept & Examples

Post date:



74 / 100

What is Effective Value?

The effective value is that market value obtained through the purchase or sale of a financial asset or right, such as credit instruments or bills of exchange.

In the field of financial and stock market economics, the concept of cash value is frequently used. In practice, it is the value assigned to a  financial instrument or right when it is transferred through a sale.

This value is directly dependent on multiple estimation factors. However, it is often set by the preferences of the holder of the holder or possessor, who agrees the sale price with the purchaser.

In this sense, it is a common concept in the acquisition of bills of exchange,  promissory notes or other financial instruments such as securities.

The cash value does not necessarily have to match its face value. For this reason it is said that it is a market value, since it is the price that must be paid in a certain market for a security, regardless of the nominal value that it has.

This value is expressed in terms of currency. For example, the effective value of a transferred bond would be 250 euros.

Relationship of Effective Value to Nominal Value

As stated above, the cash value and the face value do not necessarily coincide. In fact, their relationship gives rise to financial situations considered as above par, or below par  when it comes to financial values.

  • Above par, if the effective value is higher than the nominal value. When this happens, it is issued with a premium.
  • Under par, if the effective value is less than nominal. On these occasions it is financially indicated that it is issued at a discount.

In the case of other instruments, such as bonds or promissory notes, it is common for the effective value of the security and the face value to coincide. This is called as par. This happens on occasions when the financial performance of these securities did not alter their nominal value.

In those cases, the cash value is simply what was collected on the due date.

The concept of effective value is often confused with that of real or intrinsic value. However, this last denomination includes both tangible and intangible elements to express the value of the good (as happens with future expectations).

Therefore, the real value at a given moment may be greater than the actual value paid in a given operation. This usually happens if there are expectations of economic growth in a sector or of the economic situation, for example.

Facebook Comments Box