Legal Definitions - nominal yield

Nominal yield refers to the fixed annual interest rate that a bond or other fixed-income security promises to pay, expressed as a percentage of its face value (also known as par value). It is the stated interest rate printed on the bond certificate and represents the annual income an investor would receive based on the bond's original value, regardless of its current market price fluctuations.

• Example 1: Corporate Bond Issuance
  A company, "Green Energy Solutions," issues a new bond with a face value of $1,000 and advertises that it will pay investors 4.5% interest annually until its maturity date.

  How it illustrates nominal yield: In this scenario, the 4.5% is the nominal yield. It signifies the fixed percentage of the $1,000 face value that Green Energy Solutions is contractually obligated to pay to the bondholder each year. This rate remains constant throughout the bond's life, irrespective of whether the bond's market price increases or decreases after it is initially sold.

• Example 2: Government Treasury Bond
  An individual invests in a U.S. Treasury bond that has a face value of $10,000 and a stated interest rate of 2.0%.

  How it illustrates nominal yield: The 2.0% is the nominal yield for this Treasury bond. It means the bondholder will receive 2.0% of $10,000, which is $200, in interest payments each year. This annual payment is based solely on the bond's original terms and face value, and it does not change even if general interest rates in the financial markets fluctuate.

• Example 3: Fixed-Rate Certificate of Deposit (CD)
  A bank offers a 5-year Certificate of Deposit (CD) with a principal amount of $5,000 and a guaranteed annual interest rate of 3.2%.

  How it illustrates nominal yield: The 3.2% is the nominal yield for this CD. It represents the fixed annual percentage return that the bank promises to pay on the $5,000 principal amount for the entire five-year term. This rate is set at the time of purchase and determines the consistent interest income the investor will earn, regardless of any changes in market interest rates during the CD's duration.