Chartered Market Technician (CMT) Practice Exam

Yield on a bond is primarily influenced by the current price of the bond and the interest rate. When we refer to yield, we are often discussing how the bond's price relates to the payments it generates. The current price of the bond is crucial because as the price changes, the yield for new investors will also change.

If a bond is purchased at a price below its face value, the yield will be higher than the nominal interest rate due to the capital appreciation that occurs when the bond matures at its face value. Conversely, if the bond is bought at a premium (above its face value), the yield decreases.

Interest rates also play a significant role. When market interest rates rise, the price of existing bonds falls, leading to an increase in yield. This inverse relationship means that as the interest rates rise, new bonds are issued at higher rates, making existing lower-rate bonds less attractive unless their prices drop.

Thus, understanding how the current price of a bond and prevailing interest rates interact provides a comprehensive insight into the yield that investors can expect from investing in a bond.