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

Question

Quizplus · Accepted Answer

An improved bond rating indicates a lower credit risk associated with the bond issuer. This results in an increased demand for the bond, which causes the bond price to increase. Additionally, a lower credit risk implies a lower default risk, and hence a lower yield demanded by investors. Therefore, the bond's yield decreases. Therefore, the correct answer is that the bond's price increases, and its yield decreases, so the best option is C.

If a Bond's Rating Improves It Should Cause