Question

In the United States, there are hundreds of billions of dollars of corporate bonds that are rated BBB-/Baa3. Assume that a recession causes all of these bonds to be suddenly downgraded. What is the overriding characteristic that defines the pre-downgrade investors in the bonds? How will they respond to the rating downgrade? What effect will this have on the price of the bonds and on the debt markets generally? (3 points)

Answer 1

Pre downgraded bonds were of investment grade and after they were downgraded they where no more investment grade bonds. Before the downgrade they were carrying with repayment capability but after the downgrade there would be scepticism on their payment ability.

they would be selling out on their bonds and liquidating the bonds as quickly as they can because the bond has lost the investment appeal.

This will lead to decrease in the price of bonds and decrease in the price of debt as there is enough supply and there would not be much buyers for that.