When you are dealing with instruments in the financial market, you will encounter lots of values for the same items, such as nominal value, par value, real value and market value. These values can be different even for the same item. When you go to buy or sell financial instruments, you need to know these values and how they relate to each other in order to know if you are offering or receiving a fair price for the item.
What is Nominal Value in Simple Terms?
Nominal value is also known as face value or par value. It is the stated worth of an asset. Most likely, this was the value of the asset at the time it was issued, such as cash, bonds and stocks. For example, a $5 bill has a value of $5, which is stated on the bill. With capital goods, the nominal value is the same thing as book value, or the value of the capital item as recorded in the owner’s financial books. Investors use the nominal value to calculate the value of many bond and preferred stock assets.
What is the Market Value of an Asset?
This is the value someone is willing to pay for the asset in the marketplace. Where the nominal value is determined by the issuer of the asset, market value is set by other people who do not own the asset. Market value is determined by a variety of factors such as quantity available, weather, current events and the buyer’s desire to own the asset. As such, it's a dynamic valuation.
No Direct Relationship Except in the Bond Market
For the most part, there is no direct relationship between market value and nominal value. You can find situations where one of the values is more than the other. The only exception to this rule is in the bond market. This is because the buyer purchases the bond at a price lower than the nominal value of the bond. However, even the difference can vary depending on interest rates and nearness of the bond’s maturity date.
Understanding Premiums and Discounts
When the market value is more than the nominal value of an asset, the difference is called a premium. When the market value is less than the nominal value of the asset, the difference is called a discount. These terms have made it into everyday language with the same meanings. Premium pricing is something that costs more than it is generally worth. Discount stores are establishments that tend to sell products at low prices.
