Credit Rating

B is correct. If the bonds are downgraded from BBB to BB+, they would cross from investment-grade to speculative-grade (high-yield/junk), violating the pension fund's mandate to hold only investment-grade securities. Jennifer must prepare to sell if the downgrade occurs to maintain compliance with the fund's investment policy, even though this may require selling at depressed prices.

A is incorrect because "only one notch" represents the critical threshold between investment-grade and speculative-grade; many institutional investors have strict mandates prohibiting high-yield holdings regardless of proximity to investment-grade. C is incorrect because the fund's policy is based on maintaining investment-grade status; waiting for Moody's creates unnecessary policy violation risk if S&P downgrades first. D is incorrect because buying more bonds facing a likely downgrade increases concentration risk in securities about to violate the fund's policy and likely decline in price.

B is correct. Baa3 is the lowest investment-grade rating from Moody's, equivalent to BBB- from S&P and Fitch. Bonds rated Baa3 or higher are considered investment-grade with adequate capacity to meet financial commitments, though they may be more vulnerable to adverse economic conditions than higher-rated bonds.

A (Baa1) is investment-grade but not the minimum threshold; it's two notches higher than Baa3, equivalent to BBB+ from S&P/Fitch. C (Ba1) is the highest speculative-grade rating from Moody's, one notch below investment-grade; it's equivalent to BB+ from S&P/Fitch. D (BBB-) is the correct investment-grade threshold but for S&P and Fitch rating systems, not Moody's. The distinction between Baa3 and Ba1 represents the critical boundary separating investment-grade from speculative-grade debt.

B is correct. All three ratings (BBB- from S&P, Baa3 from Moody's, BBB- from Fitch) represent the minimum investment-grade threshold. These ratings indicate bonds with adequate capacity to meet financial commitments, though more vulnerable to adverse conditions than higher-rated securities.

A represents the highest speculative-grade ratings (one notch below investment-grade) from all three agencies; these are high-yield bonds, not investment-grade. C represents much lower speculative-grade ratings indicating highly speculative characteristics with significant credit risk. D contains conflicting ratings: S&P (BBB) and Fitch (BBB) are investment-grade, but Moody's (Ba2) is speculative-grade, two notches below the investment-grade threshold; in practice, the lowest rating typically determines market classification and institutional eligibility.

C is correct (the EXCEPT answer). Credit ratings are NOT investment recommendations to buy or sell securities. Ratings assess creditworthiness and default risk only, not whether a bond represents good value at its current market price. A highly rated bond may be overpriced (poor investment), while a lower-rated bond may be undervalued (good investment opportunity).

A is accurate: Moody's, Standard & Poor's, and Fitch are the three dominant credit rating agencies globally, often called the "Big Three." B is accurate: downgrades signal increased default risk, causing investors to demand higher yields (lower prices) to compensate for elevated risk; the inverse relationship means price decreases while yield increases. D is accurate: BBB-/Baa3 represents the minimum investment-grade threshold; bonds rated at or above this level are considered to have adequate capacity to meet obligations, while those below are classified as speculative-grade or high-yield.

B is correct. Statements 1, 3, and 4 are accurate.

Statement 1 is TRUE: An upgrade from A to AA signals improved creditworthiness and lower default risk, making the bond more valuable. Increased demand drives the market price higher.

Statement 2 is FALSE: Coupon payment amounts are fixed when the bond is issued and do not change due to rating upgrades or downgrades. The issuer continues making the same dollar coupon payments regardless of rating changes.

Statement 3 is TRUE: As the bond's price increases, its yield decreases (inverse relationship). The fixed coupon payment divided by a higher price results in a lower yield percentage. Investors accept lower yields on higher-rated bonds due to reduced risk.

Statement 4 is TRUE: Both A and AA are well above the investment-grade threshold (BBB-/Baa3). The bond was investment-grade before the upgrade and remains investment-grade after, just with enhanced credit quality.