Nominal Yield Law and Legal Definition
Nominal yield is the annual income received from a security, especially a bond, divided by the security’s par value. It is the interest rate stated on the face of a bond. It represents the percentage of interest to be paid by the issuer on the face value of the bond. Nominal yield is also known as coupon rate. It is stated as a percentage and is the same as the rate of interest the security pays.
For example: a bond that pays $90 a year and has a par value of $1,000 has a nominal yield of 9%, called its coupon rate. Only when a stock or bond is bought exactly at par value is the nominal yield equal to the actual yield. Since market prices of fixed-income securities go down when market interest rates go up and vice versa, the actual yield, which is determined by the market price and coupon rate or nominal yield, will be higher when the purchase price is below par value and lower when the purchase price is above par value.
For instance, if one has $55 in annual income on a $1,000 bond, the nominal yield is 5.5%. But if s/he paid $975 for the bond in the marketplace, the actual yield is 5.64%. Similarly, if one had paid $1,050, the actual yield would be 5.23%.
