Economics Bonds Questions Medium
The relationship between bond prices and credit ratings is generally inverse. Credit ratings are assessments of the creditworthiness of a bond issuer, indicating the likelihood of default on the bond. Higher credit ratings indicate lower default risk, while lower credit ratings indicate higher default risk.
When a bond issuer has a higher credit rating, it implies that they have a lower probability of defaulting on their bond payments. As a result, investors perceive these bonds as safer investments and are willing to pay a higher price for them. This increased demand for higher-rated bonds leads to an increase in their prices.
Conversely, when a bond issuer has a lower credit rating, it suggests a higher probability of default. Investors view these bonds as riskier investments and demand a higher return to compensate for the increased risk. Consequently, the prices of lower-rated bonds decrease as investors are willing to pay less for them.
In summary, bond prices and credit ratings have an inverse relationship. Higher credit ratings lead to higher bond prices, while lower credit ratings result in lower bond prices.