a manufacturing company receives a ratings upgrade and the price increases on its fixed- rate bond. The price increase was most likely caused by a(n):
A) decrease in the bond's credit spread.
B) increase in the bond's liquidity spread.
C) increase of the bond's underlying benchmark rate.

Question

Quizplus · Accepted Answer

A ratings upgrade indicates lower credit risk, which leads to a decrease in the bond's credit spread (the additional compensation investors demand for taking on credit risk). As the credit spread decreases, the bond's price increases. Increases in liquidity spread (the additional compensation investors demand for the bond's lack of liquidity) and underlying benchmark rates would not lead to a price increase on a fixed-rate bond.

A Manufacturing Company Receives a Ratings Upgrade and the Price