What is Nominal Value In Capital Markets?
Definition: The nominal value is the price printed on the front or face of a stock certificate, security, or any other financial instrument indicating what it will be worth at maturity. Commonly called par value 0r face value, it usually refers to either bonds or stocks. In economics, nominal value denotes the current price of a security without taking into consideration inflation or other factors.
In business and finance, nominal value denotes the price at which a security was first issued as written in front of the security. Likewise, it is the redemption price or the amount of money that an investor will get upon a bond maturing or buying a stock. In contrast to market value, the nominal value of a security remains the same until maturity.
The fact that nominal value does not take into account changes in prices can, at times, lead to misleading situations, especially when comparing values of different periods. Inflation and deflation tend to diminish the real value of an item; something that nominal value does not take into account.
In contrast, real value takes into account various factors that affect prices, such as inflation, thereby providing an accurate representation or an accurate price of an item.
Nominal Value on Stocks and Bonds
The nominal value is an important component when it comes to the computation of various financial metrics touching on bonds and preferred stock. For starters, it is used in the calculation of interest payments for bonds as well as discounts, premiums, and yields in the stock market.
The nominal value of the common stock would tend to be much lower than the market value due to forces of supply and demand in the market. However, when dealing with preferred stock, it would tend to be more in line with the market. The nominal value of a bond, on the other hand, would vary based on the prevailing interest rate.
For bonds, the nominal value is the amount of money that a bondholder stands to earn upon the maturity of the bond. For that reason, corporate municipal and government bonds typically have standard nominal values of $1,000, $5,000, and $10,000, respectively.
When dealing with stocks, the nominal value is an arbitrary value assigned when a company is issuing share capital. The value, in this case, has no or little impact on the stock’s market price. For instance, a company may opt to raise $5 million on issuing 5 million shares priced at $1 even if the stock is trading at $2 a share in the market.
Nominal Value vs. Market Value
Financial instruments or securities come with values written on top of them. Such values are dubbed nominal value. In contrast, market value is simply the price that security could fetch in the market. Likewise, market value tends to fluctuate in response to forces of supply and demand.
The nominal value of financial security would remain the same until maturity or redemption. The market value, on the other hand, does not remain the same, given the forces of inflation as well as supply and demand in the market.
Market value is often used to calculate the market capitalization of a publicly-traded company as it depicts the prevailing market price. The market capitalization, in this case, is computed by multiplying total outstanding shares and current share price.
Summary
Nominal value or face value is simply the actual value, as stated on security. In case of a bond, it could be the price at which the bond is issued or the price at which it will be redeemed. Likewise, the issue price of a bond can be higher or lower than the nominal value.
When dealing with stocks, nominal value is the price, at which a company is offering its shares in the market. The price has no relationship with the market price and tends to be a small fraction of the dollar.