Why Same-Maturity Bonds Can Have Different Yields
Summary
The document explains why bonds with the same stated maturity need not have identical yields to maturity. Coupon size changes the timing of a bond’s cash flows: higher-coupon bonds return more value earlier, which can affect yield comparisons when the curve slopes upward. Differences can also reflect liquidity, since a recently issued bond may trade more actively, and financing conditions, such as scarcity in the repo market that makes a particular issue costly to borrow.
It also cautions against treating yield to maturity as a complete measure of return for coupon bonds. Two bonds with the same final maturity but different coupons have different cash-flow schedules, so their yields are not directly comparable in isolation. The responses recommend considering duration and spread relative to a yield curve. These are conceptual explanations; the document provides no pricing data or quantitative comparison, and the relevance of each factor depends on market conditions and bond features.
Key ideas
- Bonds with the same final maturity can trade at different yields.
- Higher coupons bring more cash flow forward and can affect yield comparisons on a sloped curve.
- Liquidity and issue-specific repo financing can also create yield differences.
- Yield to maturity alone can obscure differences in coupon cash-flow timing.
- Duration and yield-curve spreads provide additional ways to compare bonds.
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Full text
# Do all bonds of the same maturity have the same yield to maturity? # Do all bonds of the same maturity have the same yield to maturity? We've been using this formula to price Bonds. c/y + (100-(c/y))/(1+y)^m where c=coupon y=yield to maturity m=time to maturity Let's take a 10 year U.S treasury for example. Price of existing bonds change according to new bonds issued on the market at par. So to price an existing 10-year US Treasury, do we look at the y-t-m of a newly issued 10-year US- treasury, to insert into the formula above? If that is the case, does that mean that all bonds of the same maturity have the same yield to maturity? ## Answer by dm63 (score 4, accepted) https://quant.stackexchange.com/a/34425 In practice, bonds of the same maturity will have yields that vary slightly from each other. Several possible reasons (a) a bond with a higher coupon is effectively shorter maturity than a bond with lower coupon, because a higher percentage of the cash flows are returned earlier. So if the yield curve is upward sloping, high coupon bonds will yield a bit less than low coupon bonds. (B) liquidity. Usually the most recently issued bond is more heavily traded so commands a higher price/lower yield than its neighbors. (C) financing. If a bond is difficult to borrow in the repo market, which may happen if that specific bond is scarce for some reason , then it can trade at a lower yield than its neighbors. Reason (a) above is purely mathematical. Whereas (b) and (c) are more technical in nature. ## Answer by Alex C (score 0) https://quant.stackexchange.com/a/34443 Yield to maturity is a very misleading measure of return for bonds with coupons. With a zero coupon bond, there is only one payment from the bond, so the maturity and the yield to maturity are well defined. But with coupon bonds there are multiple payments and then one final payment at maturity. So two 10 year bonds with different coupon sizes have different cash flows over time, they cannot be compared by using Yield to Maturity (even if they have the same maturity). Quant Finance downplays the role of Maturity and Yield to Maturity, replacing them with Duration and Spread over a yield curve as the proper way to compare bonds. (Of course people still speak of maturity and YTM, but they are no longer considered fundamental concepts).
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