I saw in the news, that when a government is in trouble, or the investors are not sure about it’s creditworthiness, the investors will require higher yield. My question is, we’re talking about yield to maturity, not the coupon yield, right? So it sounds like the investors determine the yield. But how?
The nominal coupon yield is fixed, YTM can change over time. Do investors affect the yield by buying the bonds (in this case) at discount, so that when we calculate the YTM using the bond formula, do we get higher YTM than coupon yield?
So the investors affect the YTM by determining the price for which they are willing to buy the bond? But is the government willing to sell the bond at this price? Or is the market (supply/demand) determining the price?
Thank you
In: Economics
Bonds can be sold at either a premium or discount both at issuance and in the secondary market. In the US, government bonds are sold at auction, with the clearing price being the lowest yield (highest price) for which there are sufficient bids for the amount of bonds being issued. The government sets the coupon to approximate market yields with the expectation that the bonds will sell for near par value.
Short answer: investors determine the yield at issuance by bidding at only the lowest yield they’re will to accept, and in the secondary market through normal supply/demand price discovery.
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