What does the nominal yield of a bond represent?

The nominal yield of a bond represents the annual interest rate paid to the investor, often expressed as a percentage of the bond's face value. This yield is fixed at the time of issuance when the bond is sold to investors and does not change over the life of the bond. It provides a straightforward measure of the income that an investor can expect to receive, assuming the bond is held until maturity.

Understanding nominal yield is crucial for investors as it helps them evaluate the bond’s cash flow and assess its attractiveness relative to other investment options. It is distinct from other measures of yield, such as current yield or yield to maturity, which take into account the bond's market price fluctuations or the total return over time.

The other options focus on different aspects of bond investing: total return includes both income and capital gains or losses, yield compared to market rates involves a broader evaluation of the bond's attractiveness relative to other bonds in the market, and risk pertains to the likelihood of default or changes in interest rates affecting bond prices. None of these reflect the specific definition of nominal yield but are relevant considerations for a bond investor.