1. If the interest rate rises, what happens to prices? What happens if a rating agency...
1. If the interest rate rises, what happens to prices? What happens if a rating agency downgrades a bond?
2. Suppose a firm experiences worse than expected sales, and moves closer to defaulting on its interest payments to bondholders. What will happen to the term structure of interest rates?
3. Suppose a firm issues 2 identical bonds, C and D, except that bond C is callable and is junior debt, whereas bond D is not callable and is senior debt. Which bond should have a higher coupon?
Homework Answers
1. If interest rates rise, then it implies that the cost of borrowing has increased. This leads to a decrease in bond prices. However, commodity prices may fall depending on other market conditions. A downgrade in a bond rating implies that the default risk of the bond has increased. This can lead to a fall in bond price. Additionally, it may result in lower liquidity of the bond and less trading activity.
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7.4
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