Impact of Credit Rating Downgrade on Bond Price

Medium Fixed Income Securities Credit Ratings

Credit ratings are essential for investors in fixed-income securities as they provide insights into the creditworthiness of issuers. Different rating agencies have various methodologies for assessing the risk of default associated with a bond. Understanding these ratings can help investors make informed decisions regarding their fixed income investments.

Which of the following statements accurately describes the impact of a downgrade in the credit rating of a bond?

A downgrade generally indicates a decreased likelihood of default, resulting in an increase in the bond's price.

A downgrade typically reflects a heightened risk of default, which may lead to a decrease in the bond's price.

A downgrade has no significant impact on the bond price or yield, as investors do not react to rating changes.

Hint

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