What is nominal?
Nominal means ‘in name’ or ‘expressed in monetary value’. It is a value or designation that does not necessarily take into account the actual, functional, or economic value. In economics, this can be nominal income, nominal interest, or nominal value.
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What is nominal value?
The nominal value is the value assigned to financial instruments at the time of issuance. This is the original value stated on the currency or negotiable security, such as a stock or bond. It is important to understand that the nominal value is usually not equal to the actual market value, which can fluctuate based on supply and demand.
Nominal vs real and intrinsic value
In the financial world, there are three important types of values. There is some difference in these values, let’s have a look:
- Nominal value: This is the value a product receives at issuance. It is the ‘official’ value and can be used for stocks, bonds, and currency.
- Real value: The real value takes into account inflation and the actual purchasing power of money. This reflects what you can buy with a certain amount in the current economy.
- Intrinsic value: This is the actual value of a financial product based on the underlying assets and a company’s financial situation.
The nominal value of financial products
The nominal value plays an important role in various financial products, such as stocks, bonds, and currency. Although it is the ‘official’ value, it is important to understand that the actual value of a product on the market can vary.
1. Stocks
The nominal value of a stock is the amount for which the company originally issued the stocks at the time of issuance. For an investor, the nominal value of stocks is less important than the actual value. This is because the nominal value almost never corresponds to the current stock market value.
2. Bonds
The nominal value of a bond refers to the fixed amount that the issuer (for example, a government or company) is obliged to repay to the bondholder at the end of the term. The periodic interest payment is calculated based on the nominal value. The market price of a bond, i.e. what you pay for a bond, can be higher or lower than the nominal value, depending on supply and demand. Is the stock market price equal to the nominal value of a bond? Then this is called ‘at par’.
3. Currency
With currency, the nominal value is the value stated on a coin or banknote, such as €1 or $100. This is the official value of the currency, but the actual value can fluctuate due to factors such as inflation or the exchange rate between currencies. As a result, purchasing power decreases and you can buy less with the same amount.
Calculating the nominal value of stocks and bonds
Calculating the nominal value of a stock or bond is relatively simple. For stocks, the nominal value is determined by dividing a company’s equity by the number of issued stocks at the time of issuance. Suppose a company issues 1,000 stocks with a nominal value of €1 per stock. In this case, the nominal value of the total issuance is therefore €1,000.
For bonds, the nominal value is seen as the amount the investor receives back at the maturity date. If a bond has a nominal value of €1,000, the investor receives this amount back upon redemption, regardless of the value of the bond on the market at that moment.
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All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
