A change in yield-to-maturity will cause a change in bond price. What is the source of the change in the yield-to-maturity?

The yield-to-maturity on a corporate bond has two components:

• Government benchmark yield. A change in the yield can come from a change in either of these two components:
  • Expected inflation rate.
  • Expected real rate of interest.

• A spread over government benchmark. A change in the spread can come from a change in either of these two components:
  • Credit risk of the issuer. This involves the probability of default and degree of recovery if default occurs.
  • Liquidity of the bond. This refers to the transaction costs associated with selling a bond.

Regardless of the source of the yield-to-maturity change, the bond price change caused by a change in the yield-to-maturity will be the same.

In practice, there is often interaction between changes in benchmark yields and in the spread over the benchmark.