Question

Fitch Ratings a credit rating agency, recently downgraded Vermont's debt rating from AAA to AA, citing the state's economy and changing demographics This change could supood:________.a. Increase the direct costs of the state's debt. b. Increase private investment c. Cause the vote to invest in more securities d. None of these likely to occur

Answer 1

Answer:

a. Increase the direct costs of the state's debt.

Explanation:

When a bond's rating is downgraded is a signal to the investors that investing in the bond now is riskier than it was prior to the rating downgrade, hence, a perceived higher risk using the risk/return relationship means that the bond issue would have to offer a higher return to entice the investors to invest in the bonds.

As a result, the higher required rate of return translates into a higher direct cost of the state's debt since their interest rate offered has increased