FRM Part I · FRM Exam Part I · Corporate Bonds
A firm's senior unsecured bond is rated BBB- by S&P. Following a downgrade of one notch, the bond falls to BB+. Which consequence is most directly associated with this move?
The downgrade moves the bond from investment grade to speculative grade, a fallen-angel event. Investors with mandates limited to investment-grade securities, such as some pension funds and insurers, may be forced to sell, which can widen spreads and depress the bond's price.
- AThe bond moves from investment grade to speculative grade, which may force sales by investors restricted to investment-grade holdingsCorrect
- BThe bond moves from speculative grade to investment grade, widening the investor base
- CThe bond becomes subordinated to the firm's other debt
- DThe bond's coupon is automatically cut to reflect lower risk
Explanation
BBB- is the lowest investment-grade rating on the S&P scale and BB+ is the highest speculative grade. A downgrade across this line is a fallen-angel event and can trigger forced selling by mandate-restricted investors. Ratings do not change seniority, and coupons on fixed-rate bonds do not fall automatically.
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