What is Nominal Value?
Also referred to as face value or par value, nominal value is the value shown on the face of a security certificate or instrument, including currency. The concept most commonly applies to stocks and bonds but is especially important to bond and preferred stock investors.
Nominal value is an often arbitrarily assigned amount used to calculate the dollar accounting value of a company's stock for balance sheet purposes (par value is the term commonly used in this context). For bonds and preferred stock, however, nominal value represents the amount that must be repaid at maturity. Corporate bonds usually carry a $1,000 nominal value, municipal bonds usually carry a $5,000 nominal value, and government bonds usually carry a $10,000 nominal value.
Nominal Value Example
Let's assume XYZ Company decides to issue $10 million in bonds to fund the construction of a new factory. The bonds mature in 20 years. If XYZ Company sells the bonds in $1,000 increments, each bond certificate would have a nominal value of $1,000 and the bearer of that bond would therefore be entitled to receive $1,000 from XYZ in 20 years.
If XYZ Company also agreed to pay 5% annual interest on the bonds, the bearer of an XYZ Company bond would also be entitled to $50 per year in interest payments.
Why Nominal Value is Important
Nominal value is a crucial component of many bond and preferred stock calculations including interest payments, market values, discounts, premiums and yields.
As shown in the example above, the interest on bonds is usually calculated as a percentage of nominal value. Additionally, bondholders often receive a percentage over the bond's face value as a redemption premium if the borrower repays the debt before it is due (this is often done on a sliding scale based on when the bonds are redeemed).
It is important to note that for stocks, nominal value (commonly called par value when referring to stocks) generally has no relation to market price. Bond prices, however, are heavily influenced by their nominal values and are quoted as a percentage of nominal value. Bond prices may diverge from their nominal values if their interest rates are above or below the interest rates offered by other similar bonds.
Further, although a bond's nominal value may represent the amount the bond was originally sold for (and thus how much the issuer was lent), many bonds are sold at a premium or discount to nominal value, depending on market conditions and the creditworthiness of the issuer. This is particularly true for zero-coupon bonds, which are always sold at a discount because the investor does not receive interest until the bonds mature.