Getting late........ dumb FI question

[BaseballRedhawks]

6 months ago, an investor purchased a bond that was rated BB+. Today the bond rating is changed to BBB-. The most likely effect of this rating is:

A) decreased call risk

B) increased interest rate risk

C) an increase in YTM.

ok, so doing this question. You know its not C because better ratings, would have lower yields. But why is the answer B? Why is interest rate risk up, even though your bonds are rated better?

[S2000magician]

@BaseballRedhawks

6 months ago, an investor purchased a bond that was rated BB+. Today the bond rating is changed to BBB-. The most likely effect of this rating is:

A) decreased call risk

B) increased interest rate risk

C) an increase in YTM.

ok, so doing this question. You know its not C because better ratings, would have lower yields. But why is the answer B? Why is interest rate risk up, even though your bonds are rated better?

Interest rate risk is measured with (modified or effective) duration. The factors that affect duration are:

• Time to maturity: the longer the time to maturity, the longer the duration. An upgrade in the bond’s credit rating will not affect the time to maturity.
• Coupon rate: the higher the coupon rate, the shorter the duration. An upgrade in the bond’s credit rating will not affect the coupon rate.
• Yield to maturity: the lower the YTM, the longer the duration. An upgrade in the bond’s credit rating will lower its YTM, increasing its duration, increasing its interest rate sensitivity.