How is a bond's yield determined?

A bond's yield primarily reflects the income an investor can expect to earn from it relative to its current market price. The correct method to determine a bond's yield involves dividing the annual interest payment, which is also referred to as the coupon payment, by the market price of the bond.

This relationship highlights how the yield can change according to market conditions. If a bond is priced below its face value (at a discount), the yield will increase because the investor receives the same coupon payment but pays less upfront. Conversely, if the bond is priced above its face value (at a premium), the yield will decrease since the buyer pays more for the same coupon payment.

The other options do not accurately represent how yield is determined. For instance, calculating profit from selling the bond relates to capital gains rather than yield, while evaluating the risk level may affect interest rates but does not directly calculate yield itself. Analyzing total value against annual payments could mislead since it doesn't account for current market price dynamics, which are essential in yield calculation.