SIE practice questionmediumBond ratings
If an issuer’s bond rating is downgraded from 'A' to 'BBB', what is the likely impact?
- AThe issuer will default
- BBond prices will rise
- CThe bonds will become tax-exempt
- DThe issuer will pay a higher yield on future issues✓ Correct answer
Explanation
Why D — The 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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