In 2003, ratings agencies downgraded bonds issued by the State of California several times. How will this affect the market for these bonds?
A) Yields on these bonds will decrease and the yield on Treasury bonds will increase.
B) The yield on these bonds will not change, nor will the yield on Treasury bonds.
C) The yield on these bonds and on Treasury bonds will both decrease.
D) Yields on these bonds will increase.

Question

Quizplus · Accepted Answer

When ratings agencies downgrade bonds, they are indicating that there is a higher risk associated with investing in those bonds. This higher risk means that investors will demand a higher yield in order to be compensated for taking on that risk. Therefore, yields on the State of California bonds will increase. The yield on Treasury bonds is unlikely to be directly impacted by the downgrade of California bonds, so it is not necessary to consider it as part of the answer.

In 2003, Ratings Agencies Downgraded Bonds Issued by the State