A company with a BBB bond rating will command a higher interest rate on its bonds than a company with a AA bond rating.

Question

BlackTom AI · Accepted Answer

Consider the relationship between bond ratings and required yields.
Option 1: True. When a company has a BBB rating, it is considered lower credit quality than a company rated AA, meaning higher default risk is perceived by investors. To compensate for this greater risk, the issuer must offer a higher yield on its bonds.
Option 2: False. If the statement were incorrect, it would imply that the lower-rated BBB issuer pays a lower interest rate than the higher-rated AA issuer, which contradicts the basic principle that higher risk necessitates a higher return. Investors demand more compensation for increased risk, so yields rise as credit quality falls.
Additional nuance: Bond pricing and yields move inversely to perceived default risk; as credit quality improves (higher rating), yields decrease, while deteriorating quality (lower rating) pushes yields upward to attract buyers. Therefore, a BBB-rated bond would typically have a higher coupon/required yield than an AA-rated bond, reflecting the greater risk premium.

MCD2170 - T1 - 2025 Pre-class Quiz Week 6

A company with a BBB bond rating will command a higher interest rate on its bonds than a company with a AA bond rating.

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MCD2170 - T1 - 2025 Pre-class Quiz Week 6

A company with a BBB bond rating will command a higher interest rate on its bonds than a company with a AA bond rating.

View Explanation

Log in for full answers

Similar Questions

A(n) ________ corporate bond will pay a ________ return.

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Rank these bonds in order from most secure (investment grade) to least secure (non-investment grade/ junk) based on ratings from Standard & Poor's (S&P): Tesla Bond (BB+) 4 Government of Canada Bond (AAA) [ Select ] 2 4 1 3 Netflix Bond (BBB) [ Select ] 4 3 2 1 Walmart Bond (AA) 2

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What is the highest rating a bond can have?

Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.

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More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

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