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Bonds are priced on the market by investors, so that the yield on similar securities are the same. After this the bonds yield to maturity can be calculated.
My confusion lies in the fact that, since investors use yields to maturity to assess what a fair price for the bond would be, this creates a circular dependence. Bond prices determine the yield, but investors determine the fair bond price using the yield. Seems like the price would be indeterminate in this case.
The relationship between bond prices and yields sometimes seems circular, but it's not necessarily problematic. Essentially, bond prices and their yield to maturity (YTM) move inversely. If investors demand higher yields (and hence seeking higher returns for their risk), they'll pay less for the bond, driving the price down. Conversely, if a lower yield is satisfactory, they'll pay more, pushing the price up.
Investors use YTM to determine a bond's fair price. If they think YTM is too low given the risk, they won't pay the current price, and vice versa.
In that sense it's not a one-way street where yield determines price or price determines yield. Instead, it's a dynamic interaction until the market reaches an equilibrium where the market price matches the "fair" yield. This process (supposedly) reflects the market consensus about the bond's risk and return.
