If a bond's rating improves it should cause the bond's price:
A) and yield to increase, all other factors constant.
B) and yield to decrease, all other factors constant.
C) to increase and its yield to decrease, all other factors constant.
D) to decrease and its yield to increase, all other factors constant.

Question

Quizplus · Accepted Answer

An improvement in a bond's rating is a signal of its lower risk, which means investors will be more willing to hold these bonds, thereby increasing demand for them. As a result, the bond's price will increase. In addition, with lower risk and higher demand, the bond issuer may choose to reduce the yield it offers, resulting in a decrease in bond yield. Therefore, the correct choice is C, which indicates that the bond's price will increase and its yield will decrease when the rating improves, all other factors constant.

If a Bond's Rating Improves It Should Cause the Bond's