Loading the player...

What is a 'Nominal Value'

Nominal value, with respect to bonds and stocks, is the stated value of an issued security, as opposed to its market value. In economics, nominal values refer to the unadjusted rate or current price, without taking inflation or other factors into account — as opposed to real values, where adjustments are made for general price level changes over time.

BREAKING DOWN 'Nominal Value'

Nominal value is a critical component of many bond and preferred stock calculations, including interest payments, market values, discounts, premiums and yields. Nominal and real values also play a vital role in economics, whether it be taking into account nominal GDP versus real GDP or nominal interest rates versus real interest rates.

Real values are sometimes known as current or constant dollar prices, which take changes in purchasing power into account. While the nominal rate of return reflects an investor's earnings as a percentage of their initial investment, the real rate of return takes inflation and the actual buying power of the investor's earnings into account.

Nominal Values in Economics

Nominal values, in economics, are monetary values that have not been adjusted for inflation, and therefore, include changes in price and growth. However, nominal figures are misleading when comparing values over time, because inflation diminishes real values. When presented with a real rate or real value, the nominal rate is derived from adding the real rate to the inflation rate. For example, if real gross domestic product (GDP) growth is 4% for a given year and the related annual inflation is 2%, the nominal growth rate for the year is 6%.

Nominal vs. 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, while the real exchange rate is defined as the ratio of the foreign price level and 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.

When looking at a country’s export competitiveness, it is the real exchange rate that matters. The nominal effective exchange rate (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 (REER).

Nominal Value of Bonds

For bonds, the nominal value is the face value, which is the amount required to be returned to the bondholder at maturity. Corporate bonds typically have a face value of $1,000, municipal bonds typically have a face value of $5,000, and government bonds usually have a face value of $10,000.

However, bonds sold on the secondary market fluctuate with interest rates and the creditworthiness of the issuer. For example, if interest rates are higher than the bond's coupon rate, then the bond is sold at a discount to its nominal value, or below par. Conversely, if interest rates are lower than the bond's coupon rate, then the bond is sold at a premium, or above par. Zero-coupon bonds are always sold at a discount to nominal value, because the investor does not receive interest until the bond matures.

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 issuing share capital – and is typically $1 or less. It has no relation to market price. For example, if a company obtains authorization to raise $5 million and its stock has a par value of $1, it may issue and sell up to 5 million shares of stock. The difference between the par and the sale price of stock, called the share premium, 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.

However, because preferred stocks are hybrid assets which pay dividends, and may be convertible to stock, the market price can differ significantly from the nominal value, which is the redemption price which has to be repaid at maturity.

  1. Nominal

    Nominal refers to an unadjusted rate, value or change in value. ...
  2. Fisher Effect

    The Fisher effect is an economic theory created by Irving Fisher ...
  3. Face Value

    Face value is the nominal value or dollar value of a security ...
  4. Real Economic Growth Rate

    The real economic growth rate is measure of economic growth expressed ...
  5. Nomination Committee

    A nomination committee is a committee that acts as part of an ...
  6. After-Tax Real Rate Of Return

    The after-tax real rate of return is the actual financial benefit ...
Related Articles
  1. Investing

    Interest Rates Explained: Nominal, Real, Effective

    Interest rates are divided into subcategories. Smart investors look beyond the nominal or coupon rate of a bond or loan to see if it fits their objectives.
  2. Trading

    An introduction to the international fisher effect

    The Fisher models have the ability to illustrate the expected relationship between interest rates, inflation and exchange rates.
  3. Investing

    Introduction to Treasury Inflation-Protected Securities (TIPS)

    Learn how U.S. Treasury Inflation Protected Securities (TIPS) can be easy and highly beneficial to your portfolio. They are the only securities that provide a guaranteed real rate of return by ...
  4. Personal Finance

    How Interest Rates Can Go Negative

    Central banks from Europe to Japan have implemented a negative interest rate policy (NIRP) in order to stimulate economic growth.
  5. Investing

    Explaining Interest Rate Parity

    Interest rate parity exists when the expected nominal rates are the same for both domestic and foreign assets.
  6. Investing

    Understanding the Different Types of Bond Yields

    Any investor, private or institutional, should be aware of the diverse types and calculations of bond yields before an actual investment.
  7. Investing

    How Interest Rates Affect Mutual Funds

    Find out how changing interest rates impact mutual funds, including bond and money market funds, and how higher rates can discourage investors.
  8. Financial Advisor

    Corporate Bonds and the Impact of Inflation Risk

    The impact of inflation risk affecting corporate bond returns can be significant. It may even result in a real loss of purchasing power.
  1. Calculate the difference between nominal value and real value of stock shares

    Explore the impact of real value and nominal value on stock trading. Find out how these values are assigned and what causes ... Read Answer >>
  2. What does the Fisher Effect say about nominal interest rates?

    Read about what economists call the Fisher effect, which states that real interest rates are equal to nominal rates minus ... Read Answer >>
  3. Is real GDP a better index of economic performance than GDP?

    Learn why real GDP is a better index for expressing the output of an economy, as it takes into account the factors that distort ... Read Answer >>
  4. What is the effective interest method of amortization?

    Find out more about the rationale and advantages of the effective interest rate method and how it is used to amortize a discounted ... Read Answer >>
  5. Par Value vs Face Value

    Learn about the par value and face value of securities as well as what these synonymous terms mean about the value and purchase ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center