Nominal Yield
Nominal yield, also known as coupon yield, refers to the annual interest rate stated on a bond's face value, without taking into account any premium or discount the bond may be trading at in the market. It is calculated by dividing the annual interest payment by the bond’s face value.
Example
A bond with a face value of $1,000 and an annual interest payment of $50 has a nominal yield of 5%.
Key points
• Represents the bond’s coupon rate, calculated from the face value.
• Does not account for market price changes or inflation.
• Useful for comparing bonds with different coupon rates.
Quick Answers to Curious Questions
Nominal yield is based on the bond’s face value, while current yield is calculated based on the bond’s market price, reflecting its actual return.
The bond’s stated coupon rate is set at issuance and remains unchanged regardless of market conditions.
It helps investors understand the fixed income they will receive annually, aiding in the comparison of different bonds' interest earnings.
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