Final answer:
The nominal interest rate on a bond depends on market conditions, risk of default, and changes in market interest rates after issuance, which can make the bond more or less attractive to investors.
Step-by-step explanation:
The nominal interest rate (or yield) on a bond depends on financial market conditions, which reflect expectations of future inflation, the riskiness of the bond, and the supply and demand for the bond at the time it is issued. Bonds with a high chance of default are referred to as high-yield or junk bonds. The bond yield, or the rate of return a bond is expected to provide, can vary from the stated interest rate on the bond, especially if there are fluctuations in market interest rates after the bond has been issued.
For example, a bond with a 5% coupon issued at a time when market interest rates are also 5% may have its value change if market rates shift. If rates drop to 3.5%, the bond's yield becomes more attractive as it still pays at 5%, leading to an increased demand for this bond. Conversely, if the rates increase to 6.5%, the bond becomes less attractive and its market value may decrease.
It's important for investors to understand that the interest rate printed on a bond at issue may differ from the bond yield due to movements in market interest rates over the lifetime of the bond.