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BOND MATH: The Theory Behind the Formulas by Donald J. Smith

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Some Uses of Yield-to-Maturity Statistics

I can think of four uses of (street convention) yields to maturity. First, yields can be used to price bonds. That means there is a one-to-one mapping, given the schedule of coupon and principal cash flows, between the price of a bond (including accrued interest, which we'll get to soon) and the yield to maturity. If you know the yield, you can unambiguously get the price, and vice versa. Therefore, bonds can trade on either a yield basis or a price basis. In practice, dealers usually quote just bid and ask prices and perhaps provide bid and ask yields for reference. An example of trading on a yield basis is the “when issued” market before Treasury note and bond auctions. The outcome of the auction determines ...

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