The nominal or face amount of a security, often a bond or share, is established by the issuer. For stocks, it is an arbitrary value set in the company’s charter, generally a low amount such as $0.01 or $1.00. For bonds, it represents the principal amount that will be repaid to the bondholder at maturity. The calculation itself is typically straightforward: the issuer determines the desired value, and this figure is documented in the relevant security agreements. This predetermined amount is distinct from the market price, which fluctuates based on supply, demand, and other market factors.
This established figure serves several key functions. In the context of stocks, it’s less critical from an investment perspective but plays a role in accounting and legal considerations, especially related to the company’s stated capital. For bonds, it’s a fundamental element, defining the redemption amount at the end of the bond’s term and influencing the periodic interest payments (coupon rate) which are often expressed as a percentage of this amount. Understanding this initial figure provides a foundational element for evaluating investment returns and understanding financial statements.
