Business, 14.02.2020 22:51 kassandramarie16

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.

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The Yield to maturity (YTM) is the internal rate of return earned by an investor who bought the bond today at the market price, assuming that the bond will be held until maturity, and that all coupon and principal payments will be made on schedule.

a) The bond’s price increases, its YTM decreases.

b) The bond is downgraded by the rating agencies, its YTM increases.

c) A change in bankruptcy code makes it more difficult for bondholders to receive payments in the event the firm declares bankruptcy, then the bond’s YTM would increase.

d) The economy seems to be shifting from a boom to a recession, then the possibility of a firm defaulting on its bond would increase; consequently, its YTM would increase.

e) Investors learn that the bonds are subordinated to another debt issue, then the bond’s YTM would increase.

Answer from: Galycon12

A. A bond's price increases : YIELD TO MATURITY DECREASES, the higher the bond's price and the coupon being fixed, the yield will decrease (yield % = coupon / bond price).

B. The company's bond is downgraded by the rating agencies : YIELD TO MATURITY INCREASES, since the bond price will decrease.

C. A change in the bankruptcy code makes it more difficult for bondholders to receive payments in the event the firm declares bankruptcy : YIELD TO MATURITY INCREASES , since the bond's risk increases, its price will decrease.

D. The economy enters a recession : YIELD TO MATURITY INCREASES, since the bond's risk increases, its price will decrease. As the economy enters a recession, the probability of the company not being able to pay all its debts increases.

E. The bonds become subordinated to another debt issue: YIELD TO MATURITY INCREASES, since the bond's risk increases, its price will decrease.

Answer from: Quest

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