When the market estimate of a company's riskiness increases the market adjusts by

Question

Quizplus · Accepted Answer

When the market estimate of a company's riskiness increases, investors perceive the company and its bonds as more risky, and therefore demand for those bonds decreases. This decrease in demand results in a decrease in the price of the bond, causing the yield (i.e. the interest rate paid by the bond issuer) to increase to compensate for the increased risk.

When the Market Estimate of a Company's Riskiness Increases the Market