Nominal Rate Of Return

A nominal rate is the named rate…of interest…on a bond.

Here’s a bond: Eastern Airlines, 11 3/4%ers. Famously bankrupt a zillion years ago. But what’s key here is the nominal rate on the face of the bond. That 11 ¾% thingy? That’s the nominal rate. The named rate.

But when the bond was sold, it was actually a somewhat better than lukewarm, or almost hot offering, and it sold for 105 cents on the dollar, or a 5 percent premium. So investors did not receive the nominal rate because they paid $1,050 for a $1,000 par value bond.

Instead, they received 11.75 divided by 1.05, or about 11.2 percent. So that’s nominal rate. And the performance of the bond was not, uh...pheNOMINAL.