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

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Which financial instrument's yield is primarily affected by changes in interest rates?

Stocks

Bonds

Bonds are financial instruments whose yield is significantly influenced by changes in interest rates. When interest rates rise, the yield on newly issued bonds tends to increase, making existing bonds with lower yields less attractive. Consequently, the market price of existing bonds decreases to adjust the yield to a competitive level relative to new issuances. Conversely, when interest rates fall, existing bonds with higher yields become more attractive, leading to an increase in their market prices.

The sensitivity of bond prices to interest rate changes is a key aspect of fixed-income investing, explaining why bonds are often seen as negatively correlated with interest rate movements. This characteristic is critical for investors who are managing interest rate risk and striving for specific income levels.

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Commodities

Real estate

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