Nominal bond

From Bogleheads
Jump to: navigation, search

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%
(view Google Spreadsheet in browser or download as xls, ods, or pdf)


See also

External links