Nominal bond
A nominal bond (also referred to as a conventional bond in Canada and the U.K.) is a bond which makes payments of a fixed amount, rather than a fixed real (inflation-adjusted) value. Most bonds are nominal, so the term is normally used only when contrasting nominal bonds with real-return bonds such as I Bonds or TIPS. For example, a popular bond investment strategy is 50% nominal bonds and 50% inflation-linked bonds.
Calculating real returns
To calculate the real return of a nominal bond one uses the following formula:
Real return (rr) = (1 + nominal return (rn))/(1 + inflation (π)) – 1
The following table shows the real returns for a set of nominal returns and an inflation rate of 3%.
nominal return | inflation rate | real return |
---|---|---|
1.00% | 3.00% | -1.94% |
2.00% | -0.97% | |
3.00% | 0.00% | |
4.00% | 0.97% | |
5.00% | 1.94% | |
6.00% | 2.91% | |
7.00% | 3.88% | |
8.00% | 4.85% | |
9.00% | 5.83% | |
10.00% | 6.80% |
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See also
External links
- Nominal, from Investopedia.
- Conventional Bonds - finiki