NOMINAL VALUE: Definition, Overview & Examples

NOMINAL VALUE: Definition, Overview & Examples
NOMINAL VALUE: Definition, Overview & Examples

Nominal value is an important component of many bond and preferred stock calculations, including interest payments, market value, discounts, premiums, and yields. 

The nominal value of common stock will usually be well below its market value due to supply/demand considerations, while the par value of preferred stock should be more in line with its market value.  A bond’s face value will differ from its market value based on market interest rates.

What Is Nominal Value?

Nominal value is an often arbitrarily assigned amount used to calculate the book value of a company’s stock for balance sheet purposes (par value is the term commonly used in this context). 

However, for bonds and preferred stock, the face value represents the amount to be paid at maturity.  Corporate bonds typically have a par value of $1,000, municipal bonds typically have a par value of $5,000, and government bonds typically have a par value of $10,000.

ALSO CHECK: FACE VALUE: Understanding the Face Value In Bonds & Investing

How Does It Work?

Assume that XYZ Company decides to issue $10 million in bonds to finance the construction of a new plant.  The bonds mature in 20 years.  If Company XYZ sells bonds in $1,000 increments, each bond certificate will have a face value of $1,000, and therefore the holder of that bond will be entitled to receive $1,000 from XYZ in 20 years.

If Company XYZ also agreed to pay 5% annual interest on the bonds, the holder of Company XYZ’s bond would also be entitled to $50 per year in interest payments.

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Nominal Value Calculator

The specified value of the issued security is its nominal value.  This is an important indicator when calculating bonds, shares, discounts, market value, premiums, etc. 

There is a difference between the nominal value of a security and its real value.  Usually, the market value of a commodity or security is much higher than the face value for many reasons. 

In the economy, the nominal value is important, it is the unadjusted exchange rate of the commodity, when factors such as inflation and others are not taken into account. 

When calculating the country’s nominal gross domestic product (GDP), the nominal value of goods and services will be taken into account.

ALSO CHECK: VARIABLE OF INTEREST: Definition, types and examples.

What Is The Importance Of Nominal Value?

Nominal value is an important component of many bond and preferred stock calculations, including interest payments, market value, discounts, premiums, and yields.

As shown in the example above, interest on bonds is usually calculated as a percentage of face value.  Additionally, bondholders often receive a percentage of the bond’s face value as a redemption premium if the borrower repays the debt before maturity (often on a sliding scale based on the bond’s maturity).

It is important to note that for stocks, par value (usually called face value when referring to shares) is usually unrelated to the market price.  However, bond prices are heavily influenced by their face value and are quoted as a percentage of face value.  Bond prices may differ from their face value if their interest rates are higher or lower than the interest rates offered by other similar bonds.

Also, while a bond’s face value may reflect the amount the bond was originally sold for (and therefore the amount borrowed by the issuer), many bonds sell at a premium or discount to face value, depending on market conditions and creditworthiness bond issuer. 

This is especially true of zero-coupon bonds, which always sell at a discount because the investor receives no interest until the bond matures.

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What Is Nominal Value Shares?

The nominal value of the share is the value of the share that the company assigns to the unit of the share during its issue; it is also known as par value per share and can be calculated by dividing the company’s paid-up share capital by the number of shares outstanding to date.

It refers to the value assigned to each share of a company when the company issues such share and is considered the minimum value at which the shares must be issued. 

In other words, face value is the minimum contribution that an investor is required to make when they wish to purchase shares of any company. 

This value assigned to the stock is static, unlike the market value, which is constantly fluctuating.  The par value of a share remains the same over a period of time, but changes during a stock split.

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What Is Nominal Value Of Variable?

A nominal variable is a type of variable that is used to name, label, or classify the individual attributes being measured.  It accepts qualitative values ​​representing different categories, and there is no internal ordering of these categories.

You can encode nominal variables with numbers, but the order is arbitrary and arithmetic operations cannot be performed on numbers.  This is the case when collecting a person’s phone number, postal code, national identification number, etc.

A nominal variable is one of two types of categorical variables and is the simplest of all measured variables.  Some examples of nominal variables include gender, name, phone, etc

Types Of Nominal Variable

In statistics, there is no standard classification of nominal variables into types.  However, we can classify them into different types based on some factors.  In this case we will consider 2 factors namely; assembly technique and numerical properties.

There are different methods of collecting nominal variables, which may differ primarily depending on the purpose of collecting nominal data.  Some of these methods include surveys, questionnaires, interviews, etc.

It doesn’t matter which method is used to collect data, one thing they have in common is that they are implemented using questions.  Respondents are asked open or closed questions.

Open-ended

The open method gives respondents the freedom to answer as they like.  They are allowed to express their emotions freely.

This technique is used to collect detailed and descriptive information.  For example, an organization that wants to get feedback from its customers might ask, “How do you think we can improve our services?” where question is a nominal variable.

Closed-ended

This technique limits the answers that the respondent can give to the questions.  Questionnaires provide the respondent with predetermined options to choose from.

Unlike the open method, this method collects data from the perspective of a questionnaire, thereby limiting the freedom of the respondent.  A closed approach to the question posed above will be

CONCLUSION

For any security, bond or stock, par value is the value that does not change until maturity.  In contrast, the market value of a security changes according to changes in external factors, including inflation.  Or we can say that NV is the amount that bondholders normally receive at maturity.  Corporate bonds generally have a net worth of $1,000, while municipal bonds have a net worth of $5,000.

Nominal Value FAQs

What Is The Nominal Value Of Bonds?

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

What Is The Nominal Value Of Shares?

The nominal value of a company’s stock is an arbitrary value assigned for balance sheet purposes when a company issues equity capital — usually $1 or less.  This has almost no effect on the market price of shares.  For example, if a company is authorized to raise $5 million and its shares have a par value of $1, it can issue and sell up to 5 million shares.

What Are Preferred Stocks?

Preferred stock is a hybrid asset that pays dividends and can be converted into common stock.  Par (face) value is very important here because it is the amount used to calculate the dividend.  For example, a company that issues 5% preferred stock with a par (par) value of $50 will pay an annual dividend of $2.50 (5% *$50) per share.

What Is Nominal Value in Economics?

In economics, nominal value refers to current monetary value and is not adjusted for the effects of inflation.  This makes face value somewhat useless when comparing values ​​over time.  It is for this reason that investors prefer real values ​​that take inflation into account to give a relative comparison that is more accurate and understandable.  The real rate is the nominal rate minus the inflation rate.

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