Question

Which of the following would you expect to coincide with a rise in the value of...

Which of the following would you expect to coincide with a rise in the value of a bond?

a/ A credit rating change from Baa2 to Ba1

b/ An increase in the projected loss given default

c/ A rise in the CDS spread

d/ Decreased equity volatility.

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Answer #1

A credit rating change from BAA2 to Ba1 is actually BB++ rating wherein the Bond is being downgraded.
An Increase in the Projected loss will also degrade the value of the Bond as there is high probability that the coupon on Bond will not be paid.
A rise in CDS spread means that there is high chances that there will be default in the Bond payment and therefore the Investment Banks are charging high for Credit Default Swaps.

Hence, Decrease in equity volatility with less fluctuation in the prices of the Bond will result in the rise of value of Bond.

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