Question

Suppose the credit rating agencies has upgraded the ratings of a bond issued by ABC Inc. from speculative grade to investment grade. What effect will it have on the secondary market for this bond? What will happen to price and YTM? Use a secondary market diagram to explain your answer.

Answer 1

FIRST LET US KNOW WHAT IS SPECULATIVE AND INVESTMENT GRADES, SPECULATIVE WHICH IS HAVING RATINGS BELOW BAA AND BBB, WHILE INVESTMENT GRADES ARE HIGHER RATINGS OF BAA AND BBB.

AS OF OW THE EFFECT WOULD BE HAVING A GREAT IMPACT ON THE MARKET BECAUSE THEY SELL THERE OWN SECURITIES I.E THE SHARES ARE ALREADY ISSUED BY THE COMPANY IN THE PUBLIC OFFER AND NOW THEY ARE OFFERING THEM AGAIN BY SELL OR BUY OPTIONS. SINCE THE RATINGS OF THE BONDS INCREASES THE PURCHASING WILL IS INCREASED.

HERE WE CAN SEE THE OPTIONS THAT ARE LEFT WITH THE COMPANY WITH THE SECONDARY MARKET THEY CAN SELL AND BUY THE SHARES EASILY TO GOVERNMENT, PUBLIC, INVESTORS , OTHER COMPANIES, BANKS, STOCK EXCHANGE. THIS WOULD SHOW A HEAP TO THE BOND MARKET

THE EFFECT THAT HAS ON PRICE AND YIELD TO MATURITY:

CASE 1: HERE WHEN THE BOND VALUE I.E PRICE MIGHT RISE WHERE INTEREST RATE DECLINES , AND THE YTM WOULD HAVE A AFFECT AT THE END WHERE TOTAL BOND VALUE AT MATURITY WOULD BE LOW.

CASE 2 : HERE WHEN THE BOND VALUE I.E PRICE MIGHT DECREASE WHERE THE INTEREST RATE WOULD REACH MAXIMUM, HERE YTM WOULD SHOW A HIGH VALUE.