What can you conclude regarding the relationship between bond’s rating and the rate of the...
What can you conclude regarding the relationship between bond’s rating and the rate of the return bondholders will receive if they hold the bonds until the maturity date (YTM)?
Homework Answers
A bond's rating is a grade or class given to a bond by various independent rating agency, bond rating indicates the credit quality of bond. Rating agency takes into consideration of financial strength and ability to pay off the bond holders (principal and interest) of Bond Issuer.
Bond's rate and Bond's YTM (rate of return) are inversely related which means when rating of bond is higher than its YTM is lower and vice versa. This is because lower rated bond has higher risk of default thus bond's buyer demands higher rate of return (ytm) to hold bond.
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