Question

Indicate whether each of the following actions will increase or decrease a bond's yield to maturity:a. A bond's price increases.b. The company's bonds are downgraded by the rating agencies.c. A change in the bankruptcy code makes it more difficult for bondholders to receive payments in the event a firm declares bankruptcy.d. The economy enters a recession.e. The bonds become subordinated to another debt issue.

Answer 1

a. With bond investing prices can increase or decrease as a consequence of two factors: Changes in interest rates and in credit quality. If a bond's price increases, its bond yield maturity (the return that an investor realize on a bond) decreases .

b. If a company's bonds are downgraded by the rating agencies, then its bond yield to maturity increases.

c. If a change in the bankruptcy code made it more difficult for bondholders to receive payments in the event a firm declared bankruptcy, then the bond's yield to maturity would increase and bondholders have a better chance of getting repaid than stockholders.

d. When a economy enter in a recession, the possibilities that a firm defaulting on its bond increase; due ot that reason the bond's yield to maturity would increase as well.

e. The bond become subordinated to another debt issue: When this happen, the bond will neither increase the bond's yield to maturity would increase, that means that the bondholder will still get par value unless the company decide to go bankrupt.