How Bond Prices and Yield to Maturity Relate

Summary

The document clarifies the relationship between a bond’s price and its yield to maturity. Yield to maturity is defined as the rate that discounts the bond’s cash flows to its observed price, so a quoted price can be used to calculate the corresponding yield. The accepted response explains that these are equivalent ways to express a bond’s value, rather than one being universally prior to the other.

The professor’s statement may refer instead to changes in the general yield curve: when market yields move, bond prices respond. The response also notes that practitioners may conventionally quote some classes of bonds by yield rather than by price. This distinction separates market repricing from the calculation of a yield implied by a given price. The exchange offers a conceptual explanation, not a pricing example, and does not cover differences among yield conventions or the assumptions behind yield to maturity as a return measure.

Key ideas

• Yield to maturity is the discount rate that equates a bond’s cash flows with its price.
• A bond’s observed price can be used to calculate its implied yield to maturity.
• Market yield curve changes affect bond prices, which may explain the professor’s statement.
• Practitioners may quote some bonds by yield instead of price as a market convention.

Tags

# Yield-to-maturity determines bond price or viceversa?


# Yield-to-maturity determines bond price or viceversa?












when I attended fixed-income classes, my Professor used to say that yield-to-maturity determines bond price and not viceversa.

I was wondering the meaning of this statement since the definition of yield-to-maturity is "the rate which makes the discounted bond cashflows equal to the bond price". So, from this statement, it seems to me that bond price is "given", in a certain sense, and then we can calculate yield-to-maturity.

My impression is that this topic is more or less something like "who came first? The egg or the chicken?".

Can you please help me to solve this "philosophical" question?

Thanks in advance.

## Answer by cykor21 (score 1, accepted)

https://quant.stackexchange.com/a/33496

I can only imagine that you professor meant by 'yield-to-maturity' the general yield curve shape changes which indeed affect the prices of bonds.

Normally, 'yield-to-maturity' is one of possible return measures of a bond; practitioners prefer to quote certain class of bonds in terms of yield-to-maturity instead of prices but normally bond prices and yield-to-maturity are just equivalent measures of a bond value.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.