Bond investors: they invest for the yield or the value??

CFA Level III Economics
#1

I am working on Capital market expectations section.

Question 16 in the EOC got me thinking. I got most the fixed income impact wrong.

I thought investors invest in bonds for its yield, the higher the yield, the higher the return, don’t they?

Obviously I am wrong.

#2

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#3

depends on many things…everyone wants/needs something different

what is the question

#4

The question is this:

factor expectation fixed income market impact

GDP up

Consumer spending up

business profit down

money supply up

fiscal policy up

#5

The higher yield will be realized if the bond is held to maturity (and the coupon are invested at the same higher rate), this problem has a 1 year horizon, so bond price is the key. high yield -> bond value drops-> unfavorable.

#6

Notice [South Korean] Equity Market Impact and Corporate Fixed-Income Market Impact.

Consumer Spending is slightly decrease and other expected changes are large increase/decrease.

#7

Can someone give a complete answer to this question?

What if there are large decreases in GDP, Money Supply and Government Spending?

#8

Yields move in the same direction as GDP and opposite money supply, and government spending is a component of GDP.

#9

GDP go up: negative impact (inflation pressure builds up)

consumer spending slightly decrease: positive impact (not necessarily a negative impact, so positive)

business profit down: negative (higher default risk, yield up, value down)

fiscal up: negative (inflation pressure)

monetary up: negative (inflation pressure)

#10

It seems that the investment period in this question is long term.

Otherwise, didn’t the bond investors make money when QE1 and QE2 were implemented?

#11

It apepars to me, there are never situations were increasign yield is good on this exam. Every question I see, if there is greater duration, or interest rates increase, its is almost always negatively related to portfolio value.

Is there ever a situation, in you guys observations, other than maybe some question about cash flow certainty where increasing interest rates and higher durations in conjunction are good?

#12

I think it’s assumed that you already hold the bond, in which case you’re already locked into a yield rate (yes I know reinvestment). You’d then want the value of your bond to hold up.

#13

I agree, that appears to me to always be the assumption…every time I think that its some kind of deal where an increasing interest rate may be good, I get burned…