18 Jun Nominal Value
What is Nominal Value?
Definition: The nominal value is the face value or par value of a bond or a security. The nominal value of a stock is usually set at a very low figure. However, in the case of a bond, the nominal value could indicate the amount at which it is issued or at which it would be redeemed.
What does Nominal Value mean?
The nominal value could be the issue price of a security. This would normally be printed on the certificate when it is issued. For example, a debt instrument like a bond may have its nominal value printed on it. A corporate bond could have a nominal value of $1,000.
If a bond’s nominal value is $1,000 and it is issued at this price, it is said to be issued at par. But, if it is issued at a lower amount, the issue is at a discount. A bond issue is said to be made at a premium if the issue price exceeds the nominal value.
The value of a bond could fluctuate with changes in the rate of interest in the market. A bond will trade at a discount if the market rate of interest is higher than its coupon rate. Conversely, it will trade at a premium if the bond’s coupon rate is higher than the market rate of interest.
The par value of a company’s stock usually has very little to do with its market value. For example, Apple’s shares are currently trading at $189, but the par value is only $0.00001 per share. Essentially, a share’s par value is an arbitrary figure. It does not affect its issue price or its market price.
Example of Nominal Value
Granger & Company, a firm that manufactures USB extensions and other equipment, plans to issue bonds of a total value of $50 million. It needs the funds to set up a new factory.
The nominal value of each bond is $1,000 and the coupon rate is 6.5%. Each bondholder will receive interest of $65 every year. The bonds will be redeemed at their nominal value of $1,000 after 10 years.
The issue is a success and Granger & Company is able to raise the funds that it requires for its new factory.
The nominal value of a bond is the same as its par value. It can also be referred to as the principal amount. It could be the price at which a bond is issued or redeemed. Of course, the issue price or redemption price could also be higher or lower than the nominal value.
In the case of a company’s stock, the nominal value can be very low. It is usually a small fraction of a dollar. In most instances, there is no relationship between a stock’s nominal value and its market price.