Asked by Michelle Tseng on Jul 09, 2024
Verified
A "fallen angel" is a bond that:
A) Lowered its annual interest payment.
B) Has moved from being a long-term obligation to being a short-term obligation.
C) Has moved from having a yield to maturity in excess of the coupon rate to having a yield to maturity that is less than the coupon rate.
D) Has moved from being an investment-grade bond to being a junk bond.
E) Is rated as BA by one rating agency and rated as BB by another rating agency.
Fallen Angel
Originally investment-grade bonds that have been downgraded to junk bond status due to the issuer's weakened financial condition.
Investment-Grade Bond
A bond with a high credit rating, indicating lower risk of default, making it an attractive investment option for conservative investors.
Junk Bond
A high-yield bond with a lower credit rating than investment-grade bonds, reflecting higher risk.
- Explain the impact of bond ratings on bond prices and interest rates.
Verified Answer
LM
Layni ManosJul 10, 2024
Final Answer :
D
Explanation :
A "fallen angel" refers to a bond that was originally issued with an investment-grade rating but has since been downgraded to non-investment-grade status, also known as a junk bond. This change reflects a deterioration in the issuer's creditworthiness.
Learning Objectives
- Explain the impact of bond ratings on bond prices and interest rates.