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|