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Yesterday, bonds for Risky Corp were traded for the yield-to-maturity of 6.44%, which were downgraded by S&P from BBB to BB today. If everything else is constant from yesterday (expected inflation rate etc.), the bonds' YTM should be:

a. lower than the coupon rate.
b. lower than the current yield.
c. higher than 6.44%.
d. the same as yesterday.
e. None of the above

Respuesta :

ogechukwubenedict

Answer: c. higher than 6.44%.

Explanation: a bond's rating is a measure of it's credit quality, that is, how likely a bond issuer is to repay its loan (risk of default) to investors. If any of the factors that influence credit ratings such as the bond issuer's capital structure, credit payment history, revenue, and earnings, causes a bond's rating to fall, the bond yields must increase and the price of the bond lowered to reflect more risk of default. therefore, the year to maturity (YTM) should be higher than 6.44%.

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