Indicate whether each of the following actions will increase or decrease a bond’s yield to maturity: the bond’s price increases. the bond is downgraded by the rating agencies. a change in the bankruptcy code makes it more difficult for bondholders to receive payments in the event the firm declares bankruptcy. the economy seems to be shifting from a boom to a recession. discuss the effects of the firm’s credit strength in your answer. investors learn that the bonds are subordinated to another debt issue.

1) When the bonds price increases its yield falls, the reason for this is that bond price usually increases when its coupon is higher than ytm, so if a bonds ytm was 10% and it paid a coupon for 10% and suddenly interest rates in the market fell, the bonds price would increase and its ytm would fall because the required return on the bond by the market now would be lower.

2) If the bond is downgraded by the rating agencies, its ytm will increase because now investors would want a higher return on the bond as the default risk is higher, because of which the bonds ratings have been downgraded. This would also decrease the price of the bond.

3) If a change in bankruptcy code makes it more difficult for the bondholders to receive payments in the even the firm declares bankruptcy, the ytm on the bond would increase, because now there will be a higher risk attached to holding the bond and the investors would want a higher return.

4) When the economy is heading from a boom to a recession, interest rates fall as the demand for money decreases and when interest rates fall the prices of bonds increase and because of this heading to a recession would decrease the ytm of a bond as in a recession environment investors would require a lower return.

5) If a firms credit strength is good then the ytm on its bonds will be lower as the chance of default is low and investors would require a lower return compared to if the firms credit strength was low

6 Investors learn that the bonds are subordinated to another debt issue. This  means that in the case of a default the senior class debt issue will be payed first and whats remaining would be paid to the subordinated debt issue, and this will increase the ytm of the subordinated issue as investors would want a higher return.

Explanation:

answer; read and consider the content of the items;

answerthe united states of america;