Which of the following would result in a decrease in bond prices?

	Interest rates decrease.
	Time passes and a discount bond moves closer to maturity.
	The bond rating of a bond changes from BBB to C.

Expert Solution

Answer: The bond rating of a bond changes from BBB to C.

Explanation:

We use the interest rates to discount the future cash flows of a bond to determine its present value, if the interest rates decrease, the present value will be more, in other words, the bond price will increase.

A discount bond refers to a bond that is issued at a discount to its face value. As the bond moves closer to maturity, the value of the bond moves closer to the face value or we can say the value increases as the bond approaches maturity.

If the bond rating of a bond changes from BBB to C, it means that the bond becomes more risky. This increases the expected return as investor expect higher rate to hold the bond. The increase in expected return decreases the price of the bond as increase in expected return increases the discount rate which in turn decreases the bond value.

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