Nominal Yield

The nominal yield is the annual interest rate that a bond pays, before taking inflation into account. It is calculated by dividing the annual coupon payment by the bond's face value. For example, if a bond pays a coupon of $100 per year and has a face value of $1,000, its nominal yield is 10%.

The nominal yield is important because it is the rate that investors use to compare different bonds. However, it is important to note that the nominal yield does not take inflation into account. This means that a bond with a high nominal yield may not actually be a good investment if inflation is high.

To account for inflation, investors use the real yield. The real yield is the nominal yield minus the inflation rate. For example, if the nominal yield on a bond is 10% and the inflation rate is 5%, the real yield is 5%.

The real yield is a more accurate measure of the return on an investment because it takes inflation into account. However, it is also more difficult to calculate because the inflation rate is not always known in advance.

The nominal yield and the real yield are two important concepts in bond investing. It is important to understand the difference between the two in order to make informed investment decisions.