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.