Products & Their RisksQuestion 46 of 398
If a rating agency downgrades a company's bonds, the most likely immediate effect on those existing bonds is that their:
a.Prices rise as demand increases
b.Prices fall and their yields rise
c.Coupon rates automatically increase
d.Maturity dates are shortened
Explanation
A downgrade signals higher credit risk, so investors demand a higher yield, which pushes the existing bonds' prices down. Coupons are fixed and do not change, and a downgrade does not shorten maturity.
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