When a bond's rating improves from A to AA
A)the coupon rate will fall and the price will rise.
B)both the coupon rate and the price will rise.
C)both the coupon rate will stay the same and the price will fall.
D)the coupon rate will stay the same, but the price will rise.

Question

Quizplus · Accepted Answer

When a bond's rating improves from A to AA, the bond is considered less risky and therefore more attractive to investors. This results in an increase in demand for the bond, which drives up the price. However, since the coupon rate is fixed at the time of issuance, it will not change. Therefore, the only option is for the coupon rate to stay the same, while the price of the bond rises.

When a Bond's Rating Improves from a to AA