If a rating agency downgrades a bond from AA to BBB, the yield would...

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If a rating agency downgrades a bond from AA to BBB, the yield would...

A downgrade to BBB signals higher credit risk, so investors demand more compensation for holding the bond. In bond markets, price moves inversely to yield: when risk increases, the price typically falls, and the yield to maturity rises to reflect the greater risk. Since the coupon doesn’t change, the fall in price pushes the yield upward. So the yield would increase. The exact amount depends on market conditions, but the direction is clear: higher credit risk means higher yield.

A downgrade to BBB signals higher credit risk, so investors demand more compensation for holding the bond. In bond markets, price moves inversely to yield: when risk increases, the price typically falls, and the yield to maturity rises to reflect the greater risk. Since the coupon doesn’t change, the fall in price pushes the yield upward. So the yield would increase. The exact amount depends on market conditions, but the direction is clear: higher credit risk means higher yield.

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