rating change

[the_tank]

if a company's financial situation is getting bad and the rating agency lower it's rating, will it's bond price increase? what about its stock price?

 

[ShaktiRathore]

If company is experiencing financial crisis and consequently agency lowers its rating, than demand for bonds of the company will decrease and only more risk taking investors demanding higher return would be interested. Return over maturity of bond is (F-P/P=(F/P)-1) so as P decreases the return also increases. As risk of investing in the bond now increases than investors demand higher returns(C rated bonds have higher returns than B rated) or yield.High yield means that P should be lower.
Stock price should decrease when seeing from the high risk of the company high risk->high Wacc->low value of share provided the future cash flows remains the same with company's other fundamentals.

thanks