The rate which is earned on a bond purchased at a price equal to par value, and is paid by the issuer, regardless of the current premium or discount value of that bond. It is the bond’s stated interest rate based on its face value, and is usually determined when the bond is issued and remains unchanged until maturity. Thereafter, it is not affected by fluctuations in interest rates or in the market value of a bond. It tells a holder how much he will receive in annual interest payments during the life of the bond. The following formula is used to calculate the nominal yield (coupon rate):
Nominal yield = annual interest payment/ bond face value
For example, the nominal yield of a $1,000 bond bearing a 5% coupon would be:
Nominal yield = 50/ 1,000 = 5%
Nominal yield is also known as nominal interest rate or face interest rate.
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