Meaning and definition of Nominal Value
In context of investing in bonds or securities, many terms can be quite confusing. One such term is the nominal value of a bond or security. Nominal value refers to the stated value of an issued security that remains permanent as compared to its market value, which is fluctuating by nature because of factors like inflation. The nominal value is defined by the Dallas Federal Reserve as “the value of an economic variable in terms of price level at the time of its measurement; or unadjusted for price movements.” Putting it simple, it is the face value of a bond or security. Besides, the nominal value is also, many a times, referred as the “book value” of the bond.
Calculating the Nominal Value
The main steps involved in the procedure of calculating the nominal value are:
1. Estimate the real value of the investment. The real value indicates the value after making adjustments for factors like inflation. For this example, presume the real value of a bond to be $2,000.
2. Find out the price index related to the real value of the vehicle. A price index is an evaluation of relative changes over a period of time. To obtain a real value, it should be compared with a related price index. For the aforesaid example, presume the $2,000 bond being associated with a price index of 200. This would signify that a bond had moved 200 percent as per the price index data.
3. The price index is divided by 100. In the above example, 200 would be divided by 100. The 100 here indicates the 100 percent of the bond value. This would give an answer of 2. Also, this factor would be referred as the “factor,” as it is the factor which alters the price.
4. As a final step, divide the real value by the factor too obtain the nominal value. Continuing with the example, $2,000 / 2 = $1,000. This shows that the initial nominal value of the bond was $1,000 before the rise in cost to its real value.
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