What is a face value?
The nominal value of a security, often called nominal or nominal value, is its redemption price and is normally indicated on the front of this security. For bonds and stocks, it is the declared 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 changes in the price level over time time.
Understanding the face value
Face value is an essential part of many bond and preferred stock calculations, including interest payments, market values, discounts, premiums and returns. The face value of common shares will generally be well below market value due to supply and demand considerations, while the face value of preferred shares is expected to be more in line with market value. The face value of a bond will vary from its market value based on market interest rates.
Nominal and real values also play a vital role in economics, whether they take nominal GDP relative to real GDP or nominal interest rates relative to real interest rates. Actual values take into account variations in purchasing power. While the nominal rate of return reflects an investor’s income as a percentage of their initial investment, the real rate of return takes into account inflation and the real purchasing power of the investor’s income.
Key points to remember
- The nominal value of a security, often called nominal or nominal value, is its redemption price and is normally indicated on the front of this security.
- For bonds, the nominal value is the nominal value and will vary from its market value according to market interest rates.
- The nominal (nominal) value of a preferred share is important in that it is used to calculate its dividend, while the nominal value of a common share is an arbitrary value allocated for balance sheet purposes.
- In economics, the nominal value refers to the current monetary value and does not adjust to the effects of inflation.
Face value of bonds
For bonds, the nominal value is the nominal value, which is the amount reimbursed to the bond holder at maturity. Corporate, municipal and government bonds typically have a face value of $ 1,000, $ 5,000 and $ 10,000, respectively.
If the yield to maturity (YTM) of a bond is higher than its nominal interest rate (coupon rate), the real value of the bond will be lower than its nominal (nominal) value and it is said that the bond is sold at a discount at par, or below par. Conversely, if the YTM is lower than its nominal interest rate, then the real value of the bond is higher than its nominal value and it is said to sell at premium at par or above par and if they are identical, then the bond is sold at its nominal or nominal value. Zero coupon bonds are always sold at a discount from their face value, as the investor receives no interest before the bond matures. The formula for calculating the bond market value is as follows:
Bond prices = SUM (coupon payments) / (1 + market yield) ^ i + face value / (1 + market yield) ^ n
Where: coupon payments = face value * coupon rate; i = each year; n = total number of years
For example, a 3-year corporate bond issue with a face value of $ 1,000 and a coupon rate of 10%. The annual coupon payments would be $ 100 ($ 1,000 * 10%). If the market rate (YTM) is higher than the coupon rate, say 12%, then the market value of the bond would sell at a discount at par (less than $ 1,000).The
Bond price = $ 100 / (1 + 12%) + $ 100 / (1 + 12%)2 + $ 100 / (1 + 12%)3 + 1000 $ / (1 + 12%)3
Bond price = $ 89.29 + $ 79.72 + $ 71.18 + $ 711.79 = $ 951.98
Nominal value of shares
The face value of a company’s shares, or face value, is an arbitrary value assigned for balance sheet purposes when the company issues share capital – and is generally $ 1 or less. It has little or no impact on the stock price. For example, if a company is authorized to raise $ 5 million and its shares have a face value of $ 1, it can issue and sell up to 5 million shares. The difference between the par and the sale price of the shares is called the issue premium and can be considerable, but it is not technically included in share capital or capped by authorized capital limits. Thus, if the security sells for $ 10, $ 5 million will be recorded as paid-up share capital, while $ 45 million will be treated as additional paid-up capital.
Preferred shares are hybrid assets that pay dividends and can be converted into common shares. The nominal (nominal) value is quite important here as it is the amount used to calculate the dividend. For example, a company issuing a 5% preferred share with a nominal (nominal) value of $ 50 would pay dividends of $ 2.50 (5% * $ 50) per share each year. The price of the preferred share will depend on the market appreciation of the proposed dividend percentage, in this case 5%. If the market is satisfied with 5%, the stock will trade around its nominal (nominal) value. If the dividend percentage is higher or lower than market expectations, the price of the preferred share will trade at a price higher or lower than its nominal value.
Nominal value in economy
In economics, the nominal value refers to the current monetary value and does not adjust to the effects of inflation. This makes the nominal value somewhat unnecessary when comparing values over time. It is for this reason that investors prefer real values, which take inflation into account, to give a more precise and understandable relative comparison. The real rate is the nominal rate minus the inflation rate.
Real rate = Nominal rate – Inflation rate
For example, if the nominal gross domestic product (GDP) growth rate is 5.5% in a given year and the corresponding annual inflation rate is 2%, the real GDP growth rate for the year is 3.5%.
Nominal vs real exchange rate
The nominal exchange rate is the number of units of the national currency that can buy a unit of a given foreign currency. The real exchange rate is defined as the ratio between the level of foreign prices and the level of domestic prices, where the level of foreign prices is converted into national currency units via the current nominal exchange rate. Unlike the nominal exchange rate, the real exchange rate is always floating, because even in fixed exchange rate regimes, the real exchange rate changes with inflation.
When you look at a country’s export competitiveness, it’s the real exchange rate that matters. The nominal effective exchange rate (NEER), an unadjusted weighted average rate at which a country changes for a basket of multiple 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 home country inflation rate relative to the trading partner inflation rate, which gives the real effective exchange rate (RRSP).