Nominal value of a bond

Each bond has a fixed nominal value, often £100 for a sterling 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.

Recommended

What are Gilts and why should you care about them?
Government bonds

What are Gilts and why should you care about them?

Gilts have been in the news a lot recently, but not everyone understands why these assets are so vital to the UK economy.
24 Oct 2022
LDI: another financial fix has backfired
Government bonds

LDI: another financial fix has backfired

Liability-driven investment (LDI) has become the latest widely touted investment product to go horribly wrong, says Max King.
7 Oct 2022
LDI: the “doom loop” in the bond market
Government bonds

LDI: the “doom loop” in the bond market

LDI – an investment strategy used by defined-benefit pension funds – was at the centre of last week’s panic in gilts. What exactly happened, and how w…
7 Oct 2022
The end of cheap money hits the markets
Stockmarkets

The end of cheap money hits the markets

Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
28 Sep 2022

Most Popular

Is it cheaper to leave the heating on low all day?
Personal finance

Is it cheaper to leave the heating on low all day?

The weather is getting colder and energy bills are rising, but is it really cheaper to leave the heating on low all day or should you only turn it on …
1 Dec 2022
Radiator vs electric heater – which is cheaper?
Personal finance

Radiator vs electric heater – which is cheaper?

We compare the costs, pros and cons of radiators and electric heaters and see which one will help keep your energy bill as low as possible.
28 Nov 2022
State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments
State pensions

State pension errors – why tens of thousands of mothers could be missing out on millions in state pension payments

LCP launches Mothers Missing Millions campaign amid DWP state pension errors.
3 Dec 2022