Under which conditions will an investor demand a larger return (yield) on a bond?
A)The bond issue is upgraded from A to AA.
B)The bond issue is downgraded from A to BBB.
C)Interest rates decrease due to decline in inflation.
D)None of these conditions will cause an increase in the bond's yield.

Question

Quizplus · Accepted Answer

When a bond issue is downgraded from A to BBB, the creditworthiness of the bond issuer decreases, and the risk of default increases, leading to an increased demand for higher yields by the investors. Conversely, if the bond issue is upgraded or if interest rates decrease due to decline in inflation, the risk of default decreases, and the demand for higher yields decreases, resulting in a lower yield. Option D is incorrect as an increase in yield is associated with an increase in risk (credit, interest rate, or liquidity risk).

Under Which Conditions Will an Investor Demand a Larger Return