Nominal Value
Nominal value refers to the face value of financial instruments such as bonds or shares. This guide explains how nominal value works and how it differs from market and real value.
Tumisang Bogwasi
Tumisang Bogwasi
What is Nominal Value?
Nominal value refers to the face value of a financial instrument, asset, or security as stated by the issuer. It does not reflect market value, inflation, or changes in purchasing power. The concept is widely used in bonds, stocks, currencies, and accounting.
Definition
Nominal value is the stated or face value of a financial asset or liability, unaffected by market conditions or inflation.
Key takeaways
- Face value: The amount printed on a financial instrument.
- Unaffected by inflation: Reflects original or stated value, not real value.
- Common in bonds and shares: Used to determine coupon payments or share issuance.
- Different from market value: Market price fluctuates; nominal value remains constant.
- Used in accounting: Basis for recording value in historical-cost frameworks.
Where nominal value is used
1. Bonds
The nominal value (par value) determines:
- Coupon payments
- Final redemption value
Example: A bond with a nominal value of $1,000 pays interest based on that amount.
2. Shares/Equity
Shares have a nominal value (also called par value):
- Often set at a very low amount (e.g., $0.01 per share)
- Used for legal and accounting purposes
3. Currencies
The amount printed on physical banknotes and coins reflects their nominal value.
4. Contracts & loans
Loan terms may reference nominal values for repayment amounts.
Nominal value vs. market value
| Feature | Nominal Value | Market Value |
|---|---|---|
| Meaning | Stated/face value | Current trading price |
| Affected by inflation? | No | Yes |
| Changes over time? | Rarely | Frequently |
| Use | Accounting, legal | Investment, valuation |
Nominal vs. Real Value
Nominal value:
- Not adjusted for inflation.
- Reflects stated amount.
Real value:
- Adjusted for inflation.
- Reflects true purchasing power.
Why nominal value matters
For investors:
- Provides a baseline for bond or share structure.
- Helps assess yield (coupon/nominal value).
For businesses:
- Essential for accounting and regulatory reporting.
- Used when issuing stock and managing capital.
For economists:
- Important in distinguishing nominal vs. real economic metrics.
Examples
- A $100 banknote always has a nominal value of $100, even if inflation erodes purchasing power.
- A company issues shares with a nominal value of $0.10, regardless of market price.
Related concepts
- Par value
- Market value
- Real value
- Face value
- Inflation
- Yield calculation
Sources
- OECD – Financial Market Indicators: https://www.oecd.org/
- Investopedia – Nominal value overview: https://www.investopedia.com/
- IFRS Standards – Measurement Concepts: https://www.ifrs.org/
Frequently Asked Questions (FAQ)
1. Does nominal value change over time?
Usually no. It remains fixed unless the issuer restructures the asset.
2. Are nominal and par value the same?
Yes, in most cases (especially for bonds).
3. Why do companies set low nominal share values?
To allow flexibility in issuing shares and maintaining legal capital requirements.
4. Can nominal value be higher than market value?
Yes, especially if an asset falls in price.
5. Does nominal value reflect purchasing power?
No. Real value does.
