Inter-Temporal rate of substitution

CFA Level I Portfolio Management
#1

From CFAI book:

“The investor knows that she cannot affect the price of the bond, and so she must decide whether to buy or sell the bond based on this given price, Pt,1 (0.954498 from Example 1). If this price of the bond was less than the investor’s expectation of the inter-temporal rate of substitution (suppose this is 0.9560), then she would prefer to buy more of the bond today. As more bonds are purchased, today’s consumption falls and marginal utility of consumption today rises, so that expectations conditional on current information of the inter-temporal rate of substitution, Et[˜mt,s], fall.”

Why would consumption fall if more bonds are purchased??Shouldn’t the consumption increase?

Regards

#2

Yeah the confusion here is that investment in bonds and consumption are actually competing interests. By investing more money into bonds the available funds for ‘consumption’ of other goods decreases (so by proxy ‘consumption’ decreases), meaning that the marginal utility gained from another unit of consumption increases. In examples like this you don’t actually ‘consume’ bonds when making an investment, which is what I think you’re getting caught up on.

Hope that helps.