Nominal Value - Explained
What is Nominal Value?
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Table of ContentsWhat is Nominal Value?How is Nominal Value Used?Nominal Value of BondsNominal Value of StocksNominal Value in EconomicsAcademic Research on Nominal Value
What is Nominal Value?
Nominal value is simply defined as the face value or par value of a security. When a security such as a bond or stock is sold to a buyer, the amount that reflects on the evidence of purchase or security certificate is the nominal value. The nominal value of a security also refers to the redemption price of the security, that is the amount expected to be paid for the security at maturity. In economics, the current price of a good or security that is not adjusted for inflation is the nominal value.
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How is Nominal Value Used?
The stated value of an issued security is its nominal value. It is an important metric when calculating bonds, stocks, discounts, market value, premiums and others. There is a difference between the nominal value of a security and its real value. Usually, the market value of a commodity or security is much higher than its nominal value given many reasons. In economics, nominal value is important, it is the unadjusted rate of a commodity when factors such as inflation and others are not accounted for. When calculating the nominal gross domestic product (GDP) of a country, the nominal value of goods and services will be accounted for. Here are some vital points to know about nominal value;
- The nominal value of a security is otherwise called the par value or face value of that security.
- Nominal value also refers to the amount that is expected to be paid for a security at maturity. It is the redemption price of the security.
- Nominal value is different from real value given the fact that the real value of a commodity or security accounts for inflation and other market factors while the nominal value is the unadjusted rate or current value.
- Nominal value is an important element in economics. It can be used when calculating the nominal GDP of a country, it is a value unadjusted for inflation.
Nominal Value of Bonds
The nominal value of a bond refers to the price that is expected to be paid at its maturity date, it is also the face value of the bond. When calculating the yield to maturity (YTM) of a bond, the nominal value is important. This value is also important in evaluating whether a bond is selling at a discount to par (discount to face value), or below par. You can also know whether a bond is selling at Premium to par which is above par. Generally, bonds such as corporate bonds, municipal bonds, and government bonds have par values of $1,000, $5,000, and $10,000, accordingly.
Nominal Value of Stocks
Just like in bond, the nominal value of the stock of a company is the amount written on the security certificate for the stock to be sold. The value assigned for a company's stock on its balance sheet is the nominal value of the stock. Usually, the nominal value of a company's stock is less than $1. For preferred stock, the nominal value is the amount used in calculating the dividend of preferred stock. For instance, if the preferred stock of a company is issued at a par value of $100, if the dividend is 5%, it means that the dividend that will be paid on the preferred stock is $5.
Nominal Value in Economics
In economics, the current value of finished goods and services in a country is referred to as the nominal value. This value makes no account for inflation and other factors of the economy that affect prices. According to many economists, the difference between the real rate (value) and nominal rate (value) is inflation rate. This means that to get the real rate in an economy, inflation rate should be deducted from the nominal rate.