What does the nominal yield of a bond refer to?

What does the nominal yield of a bond refer to?

• A. Market price
• B. Interest rate
• C. Tax rate
• D. Redemption value

Answer: (B)

The nominal yield of a bond refers to the interest rate that the bond pays on its face value, which is commonly expressed as a percentage. This yield is determined at the time the bond is issued and does not change over the bond's life. It is the coupon rate of the bond, meaning the amount of interest the bondholder will receive annually based on the bond’s par or face value. Understanding nominal yield is crucial because it provides investors with insight into the income they can expect to receive from the bond compared to its price and market conditions. It’s important to differentiate this from other terms related to bond investment, as nominal yield focuses solely on the periodic interest payments rather than factors like current market prices, tax implications, or the bond's ultimate redemption value at maturity.

The nominal yield of a bond refers to the interest rate that the bond pays on its face value, which is commonly expressed as a percentage. This yield is determined at the time the bond is issued and does not change over the bond's life. It is the coupon rate of the bond, meaning the amount of interest the bondholder will receive annually based on the bond’s par or face value.

Understanding nominal yield is crucial because it provides investors with insight into the income they can expect to receive from the bond compared to its price and market conditions. It’s important to differentiate this from other terms related to bond investment, as nominal yield focuses solely on the periodic interest payments rather than factors like current market prices, tax implications, or the bond's ultimate redemption value at maturity.