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.

 

Merryn

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