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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.

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    $\begingroup$ I’m voting to close this question because it is a repeat closed question. Pls don't ask pretty much the same question again after it gets closed. The best approach is to revise your original question as per necessary and ask it to be reopened. See this help page for details. $\endgroup$
    – Alper
    Jul 5, 2023 at 10:02
  • $\begingroup$ The original question was closed since I wrote that ”this is a basic question” and apparently basic questions are not allowed. Would you agree that this is such basic knowledge that it is not worth asking here? I have certainly seen more basic ones that have not been closed. $\endgroup$
    – Peit
    Jul 5, 2023 at 12:49

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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.

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