# Understand Nominal Value: Definition, Importance, and Calculation

## What Is a Nominal Value?

The nominal value, also known as face or par value, is vital in determining the redemption price of securities like bonds and stocks, distinct from their market value. This measure is crucial for economic calculations, offering insight into interest payments, discounts, premiums, and yields. Understanding nominal value helps investors evaluate the financial landscape more accurately, especially when considering inflation impacts over time.

### Key Takeaways

*   Nominal value, also known as face or par value, of a security is its redemption price and is typically printed on the security's front.  
*   In bond markets, the nominal value is the face value, and it influences bond pricing in relation to current market interest rates.  
*   For stocks, the nominal value is an arbitrary figure for issuing share capital and doesn't affect the stock's market price.  
*   Economics differentiates between nominal values, which don't adjust for inflation, and real values, which account for purchasing power changes.  
*   The nominal exchange rate measures how much domestic currency units can buy a foreign currency, while the real exchange rate factors in inflation differences.

## Why Nominal Value Matters in Finance

Nominal value is crucial for bond and preferred stock calculations, including interest, market values, discounts, and yields. Common stock's nominal value is often lower than its market value due to supply and demand. Preferred stock's nominal value usually matches its market value more closely. The nominal value of a bond will vary from its market value based on market interest rates.

[Nominal](https://www.investopedia.com/terms/n/nominal.asp) and real values also play a vital role in economics, whether it takes into account [nominal GDP](https://www.investopedia.com/terms/n/nominalgdp.asp) versus real GDP or [nominal interest rates](https://www.investopedia.com/terms/n/nominalinterestrate.asp) versus real interest rates. Real values factor in the changes in purchasing power. While the [nominal rate of return](https://www.investopedia.com/terms/n/nominal-rate-of-return.asp) reflects an investor's earnings as a percentage of their initial investment, the [real rate of return](https://www.investopedia.com/terms/r/realrateofreturn.asp) takes inflation and the actual buying power of the investor's earnings into account.

![Nominal Value: The unadjusted value of an asset or the face value of a security.](https://www.investopedia.com/thmb/lhsALayZEpsK9HFSjA2Njt2BwbY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Nominalvalue_final-a5d66e5814654542a8ba2f7b4ceee09b.png)

*— Investopedia / Michela Buttignol*

## Nominal Value: How It Influences Bond Pricing and Market Value

For bonds, the nominal value is the [face value](https://www.investopedia.com/terms/f/facevalue.asp), which is the amount repaid to the bondholder at [maturity](https://www.investopedia.com/terms/m/maturity.asp). Corporate, municipal, and government bonds typically have face values of $1,000, $5,000, and $10,000, respectively.

If a bond's [yield to maturity](https://www.investopedia.com/terms/y/yieldtomaturity.asp) (YTM) is higher than its [coupon rate](https://www.investopedia.com/terms/c/coupon-rate.asp), its value will be below its nominal value, selling at a discount. If the yield to maturity is lower than its coupon rate, the bond sells above its nominal value at a premium. If equal, it sells at par. Zero-coupon bonds are always sold at a discount to nominal value, because the investor does not receive interest until the bond matures. The formula for calculating bond market value is:

$\begin{aligned}&\text{BP} = \frac { \sum{\text{Coupon Payments}} }{ ( 1 + \text{Market Yield} ) ^ i } + \frac {\text{Face Value} }{ ( 1 + \text{Market Yield} ) ^ n} \\&\textbf{where:} \\&\text{BP} = \text{Bond price} \\&\text{Coupon Payments} = \text{Face value} \times \text{Coupon rate} \\&i = \text{Each year} \\&n = \text{Number of years} \\\end{aligned}$

For example, a 3 year corporate bond issue with face value of $1000 and a coupon rate of 10%. The annual coupon payments would be $100 ($1000 \* 10%). If the market rate (YTM) is higher than the coupon rate, say 12%, then the market value of the bond would be selling at a discount to par (less than $1000).

$\begin{aligned}\text{Bond Price} =& \frac { \$100 }{ 1 + 12\% } + \frac { \$100 }{ (1 + 12\%) ^ 2 } + \frac { \$100 }{ (1+ 12\%) ^ 3 } \\\phantom{ \text{Bond Price} = } &+ \frac { \$1000 }{ (1 + 12\%) ^ 3 } \\=& \$89.29 + \$79.72 + \$71.18 + \$711.79 \\=& \$951.98 \\\end{aligned}$

## Nominal vs. Market Value in Stocks: Key Differences

A company's stock nominal value, or par value, is an arbitrary amount for balance sheets, often $1 or less. It has little to no bearing on the stock's market price. For example, if a company's stock has a $1 par value, it can issue 5 million shares to raise $5 million. The difference between the par and the sale price of stock is called the [share premium](https://www.investopedia.com/terms/s/sharepremiumaccount.asp) and may be considerable, but it is not technically included in share capital or capped by authorized capital limits. So, if the stock sells for $10, $5 million will be recorded as paid share capital, while $45 million will be treated as additional paid in capital.

[Preferred stocks](https://www.investopedia.com/terms/p/preferredstock.asp) are hybrid assets that pay dividends and may be converted to common stock. The nominal (par) value is quite important here, as this is the amount used to calculate the dividend. For example, a company issuing a 5% preferred stock with a par (nominal) value of $50 would be paying dividends of $2.50 (5% \*$50) per share annually. The preferred stock's price will depend on the market's assessment of the dividend percentage being offered, in this case, 5%. If the market is satisfied with 5% then the stock will trade around its nominal (par) value. If the dividend percentage is higher or lower than market expectations then the preferred stock's price will trade at a higher or lower price than its nominal value.

## Nominal Value in Economics: Analyzing Inflation Impacts

In economics, nominal value refers to the current monetary value and does not adjust for the effects of inflation. This renders nominal value a bit useless when comparing values over time. It is for this reason that investors prefer real values, which factor in inflation, to give a relative comparison that is more accurate and understandable. Real rate is the nominal rate minus the inflation rate.

$\text{Real Rate} = \text{Nominal Rate} - \text{Inflation Rate}$

For example, if nominal [gross domestic product](https://www.investopedia.com/terms/g/gdp.asp) (GDP) growth rate is 5.5% for a given year and the related annual inflation rate is 2%, then the real GDP growth rate for the year is 3.5%.

## Understanding Nominal and Real Exchange Rates: A Comparative View

The nominal [exchange rate](https://www.investopedia.com/terms/e/exchangerate.asp) is the number of units of the domestic currency that can purchase a unit of a given foreign currency. The real exchange rate is defined as the ratio of the foreign price level to the domestic price level, where the foreign price level is converted into domestic currency units via the current nominal exchange rate. In contrast to the nominal exchange rate, the real exchange rate is always floating, because even in fixed exchange rate regimes, the real exchange rate changes as inflation changes.

A country's export competitiveness is best measured by the real exchange rate. The [nominal effective exchange rate](https://www.investopedia.com/terms/n/neer.asp) (NEER), an unadjusted weighted average rate at which one country's currency exchanges for a basket of multiple foreign currencies, is an indicator of a country's international competitiveness in terms of the foreign exchange market. But the NEER can be adjusted to compensate for the inflation rate of the home country relative to the inflation rate of its trading partners, resulting in the [real effective exchange rate](https://www.investopedia.com/terms/r/reer.asp) (REER).

## The Bottom Line

The nominal value, also known as face or par value, is a key concept in finance, particularly in securities and economic contexts. For bonds, it represents the redemption price, while in stocks, it often serves an arbitrary role for balance sheet purposes. Understanding the difference between nominal and market values is crucial, as market conditions can cause significant variations. In economics, nominal values are not adjusted for inflation, underscoring the importance of distinguishing them from real values, which factor in purchasing power. Whether dealing with bonds, stocks, or broader economic measurements like GDP and exchange rates, recognizing the role of nominal values can aid in making informed financial decisions.