Indicate whether each of the following actions will increase or decrease a bond`
ID: 2728887 • Letter: I
Question
Indicate whether each of the following actions will increase or decrease a bond`s yield to maturity:
a. The bond`s price increases.
b. The bond is downgraded by the rating agencies.
c. A change in the bankruptcy code makes it more difficult for bondholders to receive payments in the event the firm declares bankruptcy.
d. The economy seems to be shifting from a boom to a recession. Discuss the effects of the firm`s credit strength in your answer.
e. Investors learn that the bonds are subordinated to another debt issue.
Explanation / Answer
The bond`s price increases YTM decreases. The bond is downgraded by the rating agencies YTM increases because the price of the bond decreases A change in the bankruptcy code makes it more difficult for bondholders to receive payments in the event the firm declares bankruptc YTM increases. The economy seems to be shifting from a boom to a recession. Discuss the effects of the firm’s credit strength in your answer If the economy shifts to a recession, then the probability of default on its bond would increase, so YTM increases. Investors learn that the bonds are subordinated to another debt issue, then the bond’s YTM would increase
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