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

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.


depends on many things…everyone wants/needs something different

what is the question

The question is this:

factor expectation fixed income market impact

GDP up

Consumer spending up

business profit down

money supply up

fiscal policy up

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.

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.

Can someone give a complete answer to this question?

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

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

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)

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?

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?

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.

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…