Nominal yield is the interest rate stated on a bond when issued. It is also known as the coupon rate or the fixed rate of return on a bond. This yield is calculated as a percentage of the bond's face value and is paid periodically to bondholders.
What is the nominal yield of a bond with a face value of $1,000 and an annual interest payment of $40?
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Select an option above to see an explanation here.
A) The nominal yield is calculated as the annual interest payment divided by the face value. 2% of $1,000 is $20, not $40. B) The nominal yield is calculated as the annual interest payment divided by the face value. 4% of $1,000 is $40, which is the correct answer. C) The nominal yield is calculated as the annual interest payment divided by the face value. 6% of $1,000 is $60, not $40. D) The nominal yield is calculated as the annual interest payment divided by the face value. 8% of $1,000 is $80, not $40.
Which of the following yields considers the total return an investor can expect to receive if a bond is held to maturity, including interest payments and capital gains or losses?
A) Nominal yield only considers the interest rate stated on a bond. B) Current yield considers the annual income from a bond as a percentage of its current market price. C) Yield to maturity considers interest payments and any capital gains or losses if the bond is held to maturity, which is the correct answer. D) Yield to call considers the total return if the issuer calls a bond before maturity.
Which type of bond allows the issuer to redeem the bond before its maturity date, usually at a premium to the face value?
A) The issuer can redeem callable bonds before their maturity date, usually at a premium to the face value, which is the correct answer. B) The issuer cannot redeem non-callable bonds before maturity. C) Convertible bonds can be converted into a specified number of shares of the issuer's common stock. D) Zero-coupon bonds do not pay periodic interest payments and are sold at a discount to their face value.
In the early 1980s, interest rates were historically high due to high inflation. As a result, bonds issued during this time had high nominal yields, sometimes exceeding 15%. As a result, investors who purchased these bonds and held them to maturity received a high fixed rate of return, even as interest rates declined in the following years.
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Example Series 65 Example Practice Question
A corporation issues a 10-year bond with a face value of $1,000 and a nominal yield of 5%. This means that the bondholder will receive $50 in interest payments each year for the next ten years, regardless of changes in market interest rates.
Nominal yield, the coupon we see, fixed interest rate, for you and me.
Nominal Yield = (Annual Interest Payment / Par Value) * 100 - Annual Interest Payment: The amount of interest paid to the bondholder each year. - Par Value: The face value of the bond, typically $1,000.
Suppose a bond has an annual interest payment of $50 and a par value of $1,000. Divide the annual interest payment by the par value: $50 / $1,000 = 0.05 = 5%