Question
In: Finance
Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds,...
Explain how the downgrading of bonds for a particular corporation affects the prices of those bonds, the return to investors that currently hold these bonds, and the potential return to other investors who may invest in the bonds in the near future
Solutions
Expert Solution
If bonds are downgraded, it means they are more risky. Bond investors will demand higher returns for investing in riskier bonds. Therefore, the yield of the bonds will rise.
Price of a bond, and its yield are inversely related. Higher the yield, lower the bond price.
Thus, if a bond is downgraded, its yield will rise, and its price will fall.
If an investor is currently holding the bond, their returns will not change if they plan to hold the bond until maturity. However, the returns may decrease if the investor plans to sell the bond soon, as the bond price will fall.
For investors who may invest in the bonds in the near future, the returns will increase, since the bond's yield will be higher.
jeff jeffy answered 2 years agoRelated Solutions
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