Chartered Market Technician (CMT) Practice Exam

When a bond's price is greater than 100, it indicates that the bond is trading at a premium. This typically occurs when the bond's coupon rate is higher than current market interest rates. Consequently, the yield, which reflects the income generated by the bond relative to its price, will be lower than the coupon rate. The yield is inversely related to the bond's price; when the price is above par (100), the yield decreases.

In this scenario, because the bond is priced above its face value, investors are willing to pay more for it due to its attractive coupon payments. However, the yield calculation takes into account the price paid for the bond, meaning when the price exceeds 100, the yield must be lower than the stated coupon rate. This relationship between price and yield is fundamental to fixed income securities.