What is the affect on value of bond due fall in bond rating from AAA to...

What is the affect on value of bond due fall in bond rating from AAA to BB

(explain with risk, return, value)

Why Cash Flow, Required Return and Year needed to straight fixed rate bond

PV=FV(1+k)-n

Expert Solution

Bond Ratings are gradings that indicate the financial position of a Bond in terms of Credit Quality, Liquidity status and Debt position. It provides information about the Balance Sheet position of the Bond Issuer, about the ability to service debts and also about the ability to continue operations in the future.

Whenever a Bond is degraded from AAA to BB rating, it spells out a problematic situation for the Issuer of the Bond.

Risk - The risk value associated with the Bond increases as its likelihood of default increases. High rated bonds are associated with Government Bonds and other stable instruments. However, low rated bonds are associated with riskier companies and often some companies which may fail altogether offering no yield for the investors.

Return - The risk value with downgraded bonds is high and so they offer high rates of return. This is how they attract investors in spite of the higher associated risk.

Value - If the bond is degraded the bond price declines and if the bond is upgraded the bond price goes up.

jeff jeffy answered 6 months ago

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