Question

Which of the following events or bond contract features would increase the YTM on a corporate bond:

(a) a provision in the bond that allows the issuer to buy back the bond

(b) a convenant that limits management actions as the firm nears default

(c) a positive increase in the priice of the firms stock

(d) a decrease in the price of the firms stock

Answer 1

a)

While price of the bond is inversely proportional to the bond yields, the prices are affected by change in yields and not vice versa as prices do not rise or fall without yield changing. The bond yields are affected by major economic factors like interest rates, inflation, yield curve etc. Other major reasons for change in yields in internal firm level metrics and factors like credit rating and industry sector. If there is a covenant as part of contract that limits the management action as firm near defaults, this can be a reason for increase in YTM on the bond.

So Answer is (b) a convenant that limits management actions as the firm nears default