Asked by Tehilla Peyamipour on Jul 03, 2024
Verified
If a bond rating lowers, one can expect the bond's current yield to ____.
A) remain the same
B) increase
C) decrease
D) equal the coupon rate
Coupon Rate
The interest rate paid yearly on a bond, represented as a percentage of its par value.
Bond Rating
An assessment of the credit quality of a bond, typically issued by a rating agency, which indicates the likelihood of the bond issuer defaulting.
Current Yield
The annual income (interest or dividends) divided by the current price of the security, often used in context with bonds.
- Comprehend the theory and consequences of bond ratings concerning yield and pricing.
Verified Answer
ZK
Zybrea KnightJul 04, 2024
Final Answer :
B
Explanation :
When a bond's rating is lowered, it typically means the issuer's creditworthiness has decreased, making the bond riskier to investors. To compensate for this increased risk, the bond's price usually drops, causing its current yield (interest payment divided by the current price) to increase, as the interest payment remains constant.
Learning Objectives
- Comprehend the theory and consequences of bond ratings concerning yield and pricing.