When investors doubt the creditworthiness of a borrower what should happen to the price and yield of a bond?

When investors doubt the creditworthiness of a borrower, what should happen to the price and yield of a bond

Question: When investors doubt the creditworthiness of a borrower, what should happen to the price and yield of a bond?

A. Price goes down, yields go up 

B. Price goes up, yields go down 

C. Price goes down, yields go down 

D. Price goes up, yields go up

Answer: Prices go down, yield go up.

Explanation

The opposite relationship between price and yield is true when it comes to bonds. If you have any doubts about creditworthiness, then your investment will fall in value while at the same time increasing its yield with more risk involved because there are fewer willing buyers or sellers on this market based on uncertainty from other parties’ opinions.

Bond prices drop as we gain knowledge that an entity might not be able to repay its debt obligations. However, the yield of bonds increases along with its risk. This can happen because of uncertainty about a certain entity’s ability to repay its debts, making it harder for other parties to find willing buyers on this market or because there are fewer willing sellers.

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The definition of creditworthiness

The opposite relationship between price and yield is true

The definition of creditworthiness can vary depending on who you ask, but most definitions include some variation of the following:

  • How likely it is that an entity will be able to repay its debts
  • The amount of risk involved in investing in bonds issued by an entity
  • The measure of creditworthiness is based on factors such as a company’s profitability, cash flow, amount of debt outstanding and history of meeting debt payments.

Creditworthiness means how likely it is that the issuer will be able to repay its debt obligations. The higher the creditworthiness, the less risky it is for an investor to buy bonds from that issuer, and vice versa.

This determination is based on factors such as a company’s profitability, cash flow, amount of debt outstanding, and history of meeting debt payments.

Creditworthiness (also known as creditworthiness) refers to how likely it is that an entity will be able to repay its debts. The higher the creditworthiness, the less risky it is for an investor to buy bonds from that issuer, and vice versa.

This determination is based on factors such as a company’s profitability, cash flow, amount of debt outstanding, and history of meeting debt payments.

Video Resources

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FAQ

What is Bond?

A bond is a debt security, usually issued by a government or corporation, that promises to pay the holder periodic interest payments (coupons) and to repay the principal amount of the security at maturity.

A bond is a debt security, usually issued by a government or corporation, that promises to pay the holder periodic interest payments (coupons) and to repay the principal amount of the security at maturity.

A bond is a type of loan in which an investor loans money to an entity in exchange for regular interest payments over a set period of time and the return of their original investment at maturity. Bonds are used by companies, municipalities, states, and countries to finance various projects and operations.

Final Words

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