Why do bond investors want a higher yield? I have always found confusion. Because in L1, I have read that as bond yield increases, its price decreases. So, any investor who has bought the bond, i.e, who already holds the bond… How would he calculate the yield? How would he calculate the yield in between the life of the bond and want it to be higher? Higher to what? And by theory higher yield always lowers the bond current price which would be the selling price…
On second thoughts, I do think that a higher yield is for a person who is about to invest in a bond, and if he is paying a price of say 1030, his yield would be lower in comparison to a person who pays 980, on a bond of par value 1000. So, may be that way, any new investor would always want a higher yield…
When you BUY a bond (assuming a generic bullet with no calls etc) you are able to hold that bond until maturity, if you hold it until maturity you are going to get that yield (CPN+/-Amort) so additional changes in the rates can change the current market value of your investment (Unrealized G/L) and change the reinvestment rate you are able to receive on the coupons, but you are still going to receive known coupons & a known amortization on the bond to receive the principal at maturity.
A higher yield is more desirable because you are getting more for your money. As you realized in your second example: For a 5% coupon bond I would much rather pay the 980 vs 1030! You are purchasing those 5% coupons at a discount for 980, you are paying a premium at 1030.
If you are currently holding a bond in your portfolio, you want yields to lower, so the price of your bonds get higher. However, if you are going to hold the bond until maturity, movements in the yields will not affect your wealth at maturity.
In the other hand, if you want to buy a bond, as Yayyywork said, you want yields to rise (prices fall).
What investors want depends what investment strategy they currently have.
Yields at maturity do depend on rates to the extent that you are able to reinvest the coupons at that lower/higher level. YTM calcs are based on the “assumption that you can reinvest at the same rate” when you buy it, but that isnt the case most of the time.
That’s true, reinvestment rate is key.