Nominal value refers to the amount of money a financial instrument is denominated in.
This represents a reference figure from which contractual entitlements or obligations can be derived in terms of their amount, such as the amount of interest payments. It is important to note that the notional amount does not have to be the same as the actual value of the underlying instrument. For example, certain derivatives may have a value of zero despite having a high nominal value.
In the case of par value shares, the nominal value indicates the amount by which the shareholder participates in the share capital of a public limited company. However, the nominal value may differ considerably from the current stock exchange price of the share. For example, a share with a high nominal value may have a low stock market price due to demand and supply.
The nominal value is also an important factor for bonds and other fixed-interest securities. Here, the nominal value refers to the amount that the issuer must pay back to the investor when the security matures. The nominal value is often referred to as the face value and serves as a reference for calculating interest payments and other obligations that exist in relation to the security.
