Chartered Market Technician (CMT) Practice Exam 2025 – Your All-in-One Guide to Exam Success!

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What does a high yield on a bond typically indicate about its risk?

Low risk of default

Average market conditions

High risk of default

A high yield on a bond typically indicates a high risk of default. This relationship exists because investors demand higher returns (or yields) as compensation for taking on greater risk. When a bond is perceived to have a higher chance of defaulting—meaning the issuer may not be able to fulfill payment obligations—buyers require a higher yield to offset that potential loss.

In contrast, bonds that are seen as lower risk typically offer lower yields since investors are willing to accept less return for more security. The market conditions and issuer stability also weigh into this equation; hence, a high yield is often a signal of underlying concerns regarding the issuer's financial health or industry conditions. Understanding this relationship is crucial for investors in assessing the risk-reward balance in their portfolios.

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Stability in earnings

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