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Discuss how default risk, bond ratings and bond prices are related. Please be specific and complete....

Discuss how default risk, bond ratings and bond prices are related. Please be specific and complete. Describe three things that could affect a bond’s rating

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Higher default risk increases YTM and decreases price of bond.Lower default risk decreases YTM and increases price of Bond.
Downgrading bond rating increases YTM and decreases price of bond, upgrading bond rating decreases YTM and increases price of Bond.

Three things that affect a bond's rating:
1. The debt ratio or leverage in the company. Higher debt ratio increases risk in the firm and hence decreases the bond rating of the firm.
2. The Debt coverage ratios and interest coverage provide information about the debt repaying capacity of company. Higher the ratios the bond will be rated higher.
3. The profitability also affects bond rating. Lowering profit decreases bond rating and increasing profit ratios increases bond ratings.

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