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SIE: Debt Securities
SIE practice questionmediumBond ratings

If an issuer’s bond rating is downgraded from 'A' to 'BBB', what is the likely impact?

  1. AThe issuer will default
  2. BBond prices will rise
  3. CThe bonds will become tax-exempt
  4. DThe issuer will pay a higher yield on future issues✓ Correct answer
Explanation

Why DThe issuer will pay a higher yield on future issues

A downgrade increases perceived risk, so yields must rise to attract buyers. Bond prices generally fall, and tax status/default are unrelated to ratings.

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