Actually I am facing a huge discussion at work about the vocabulary we are using to test products. We keep returning on the question; when do we use the term "Notional" and when do we use "Nominal" I know that Notional is a value that doesn't change over time (= Par value at issue date ) So what is the difference between it and "Notional" and when should we use these terminologies exactly ?
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5$\begingroup$ Notional and nominal mean the same thing when referring to a bond, interest rate swap, credit default swap etc (though you only really hear nominal when referring to bonds). I tend to prefer "notional" for all cases because "nominal" has another, completely separate, meaning in finance and economics. Specifically, when making a distinction between nominal and real interest rates, nominal means "not adjusted for inflation". $\endgroup$– Chris TaylorFeb 27, 2020 at 17:40
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$\begingroup$ @ChrisTaylor Thank you for your comment. So do you think that it is more technical to use "Notional" and -let's say- "get rid" of the usage of "Nominal" ? $\endgroup$– NamesTBillFeb 27, 2020 at 19:48
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$\begingroup$ That's my preference (you will still hear some people refer to the nominal value though). $\endgroup$– Chris TaylorFeb 28, 2020 at 9:09
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2 Answers
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The definition depends whether or not you're discussing bond/swap trading or macroeconomics.
For bonds and swaps, the "notional" or "nominal" values are the same thing.
In macroeconomics however "nominal" rates are the stated interest rates before deducting the rate of inflation. (As opposed to the "real" interest rates which are inflation-adjusted)
I think the reason you don't hear "nominal" as often as "notional" for structured products is to preserve this distinction.
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Notional - "existing as or based on a suggestion, estimate, or theory; not existing in reality."
Notional should be used for derivatives (such as swaps). Nominal should be used for cash products such as bonds
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3$\begingroup$ I don't think "10 million nominal value of amortizing bond X, price 102.3, factor 0.75" sounds right. Face value maybe. $\endgroup$ Aug 24 at 12:43
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$\begingroup$ "Notional" is used for bonds all the time. "Nominal" is more commonly used to describe a value that has been adjusted by inflation - e.g. an inflation-indexed bonds have a "Nominal" face amount that increases with inflation and a "Real" face amount which does not. $\endgroup$ Aug 24 at 20:02