Nominal value of a bond

When you buy petrol you pay the market price per litre. The price will vary depending on supply and demand, but the unit of measurement – one litre – is fixed. So it is with bonds (IOUs issued by companies and governments).

Each bond has a fixed nominal value, often £100 for a sterling bond. This is set when the bond is issued and remains the same until it is redeemed (bought back and cancelled by the issuer). It matters because, on a fixed-income bond, the nominal value is used to work out the annual coupon. If the rate is, say, 5%, then the coupon payment each year will be £5.

The nominal value is also the amount the issuer will pay to redeem the bond at the end of its life. However, in the meantime the bond market will decide what the bond is worth – its market price. This is a function largely of what else investors can do with their money. For example, if a bank account offers a return of 6% on, say, £100, no one will pay £100 for a bond that only offers 5% fixed.

• See Tim Bennett’s video tutorial: Bond basics.

 

MoneyWeek magazine

Latest issue:

Magazine cover
The hunt for water

The most valuable commodity

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 4 FREE Issues

Robert Shiller: why one of the world's smartest economists is worried about the bond market

Merryn Somerset Webb talks to Yale professor and Nobel Prize winner Robert Shiller about how the power of 'stories' drives the global economy and creates financial bubbles.


Which investment platform?

When it comes to buying shares and funds, there are several investment platforms and brokers to choose from. They all offer various fee structures to suit individual investing habits.
Find out which one is best for you.


27 February 1900: The Labour Party is launched

Responding to the need for a single political party to represent the trade unions, the Labour Party was formed on this day in 1900, led by MP Keir Hardie.