Nominal Value

What is a Nominal Value?

Nominal value of a security, frequently alluded to as face or par value, is its redemption price and is typically stated on the front of that security. With respect to bonds and stocks, it is the stated value of an issued security, instead of its market value. In economics, nominal values allude to the unadjusted rate or current price, without considering inflation or different factors rather than real values, where changes are made for general price level changes over the long run.

Grasping Nominal Value

Nominal value is a critical part of many bond and preferred stock estimations, including interest payments, market values, discounts, premiums and yields. Nominal value of common stock will for the most part be a lot of lower than its market value due to supply/demand considerations while the nominal value of preferred stock ought to be more in accordance with its market value. The nominal value of a bond will differ from its market value in view of market interest rates.

Nominal and real values likewise play an essential job in economics, whether it considers nominal GDP versus real GDP or nominal interest rates versus real interest rates. Real values factor in the changes in purchasing power. While the nominal rate of return mirrors an investor's earnings as a percentage of their initial investment, the real rate of return takes inflation and the genuine buying power of the investor's earnings into account.

Nominal Value of Bonds

For bonds, the nominal value is the face value, which is the amount repaid to the bondholder at maturity. Corporate, municipal, and government bonds normally have face values of $1,000, $5,000, and $10,000, respectively.

In the event that a bond's yield to maturity (YTM) is higher than its nominal interest rate (coupon rate) then, at that point, the real value of the bond will be lower than its face (nominal) value and the bond is said to selling at a discount to par, or below par. On the other hand, in the event that the YTM is lower than its nominal interest rate, the real value of the bond is higher than its face value and it is supposed to sell at a premium to par, or above par and on the off chance that they are something similar, the bond is selling at its nominal, or par, value. Zero-coupon bonds are constantly sold at a discount to nominal value, in light of the fact that the investor doesn't receive interest until the bond develops. The formula for computing bond market value is:

Bond price = SUM(coupon payments)/(1 + market yield) ^ I + Face Value/(1 + market yield) ^ n****Where: coupon payments = face value * coupon rate; I = every year; n = total number of years

For instance, a long term corporate bond issue with face value of $1000 and a coupon rate of 10%. The annual coupon payments would be $100 ($1000 * 10%). In the event that the market rate (YTM) is higher than the coupon rate, say 12%, then the market value of the bond would sell at a discount to par (under $1000).** **

Bond price = $100/(1+12%) + $100/(1+12%)2 + $100/(1+12%)3 + $1000/(1+12%)3

Bond price = $89.29 + $79.72 + $71.18 + $711.79 = $951.98

Nominal Value of Stocks

The nominal value of a company's stock, or par value, is an arbitrary value assigned for balance sheet purposes when the company is giving share capital - and is regularly $1 or less. It makes little difference to the stock's market price. For instance, in the event that a company gets authorization to raise $5 million and its stock has a par value of $1, it might issue and sell up to 5 million shares of stock. The difference between the par and the sale price of stock is called the share premium and might be significant, yet it isn't technically remembered for share capital or capped by authorized capital limits. Thus, if the stock sells for $10, $5 million will be recorded as paid share capital, while $45 million will be treated as extra paid in capital.

Preferred stocks are hybrid assets which pay dividends and might be switched over completely to common stock. The nominal (par) value is very important here as this is the amount used to compute the dividend. For instance, a company giving 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 rely upon the market's assessment of the dividend percentage being offered, in this case 5%. On the off chance that the market is happy with 5%, the stock will trade around its nominal (par) value. On the off chance that the dividend percentage is higher or lower than market expectations, the preferred stock's price will trade at a higher or lower price than its nominal value.

Nominal Value in Economics

In economics, nominal value alludes to the current monetary value and doesn't adapt to the effects of inflation. This renders nominal value a bit futile while comparing values over the long run. It is therefore that investors favor real values, which factor in inflation, to give a relative comparison that is more accurate and reasonable. Real rate is the nominal rate minus the inflation rate.

Real rate = Nominal rate - Inflation rate

For instance, if nominal gross domestic product (GDP) growth rate is 5.5% for a given year and the connected annual inflation rate is 2%, then the real GDP growth rate for the year is 3.5%.

Nominal versus Real Exchange Rates

The nominal exchange rate 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 changed over into domestic currency units through the current nominal exchange rate. As opposed to the nominal exchange rate, the real exchange rate is continuously floating, since even in fixed exchange rate systems, the real exchange rate changes as inflation changes.

While taking a gander at a country's export intensity, it is the real exchange rate that is important. The nominal effective exchange rate (NEER), an unadjusted weighted average rate at which one country's currency exchanges for a basket of numerous foreign currencies, is an indicator of a country's international seriousness in terms of the foreign exchange market. Yet, the NEER can be adjusted to make up for the inflation rate of the nation of origin relative to the inflation rate of its trading partners, coming about in the real effective exchange rate (REER).

Features

• For bonds, the nominal value is the face value, and will shift from its market value in view of market interest rates..
• Nominal value of a security, frequently alluded to as face or par value, is its redemption price and is regularly stated on the front of that security.
• A preferred stock's nominal (par) value is important in that it is utilized to work out its dividend while the nominal value of common stock is an arbitrary value assigned for balance sheet purposes.
• In economics, nominal value alludes to the current monetary value and doesn't adapt to the effects of inflation.