18 Jun What is Nominal Value?
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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.
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.
What does nominal value mean?
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.
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.
Example of nominal value
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.