Question: Why as an investor you expect more price when there is a default risk possibility?
Answer: Because following one of the reasons - Higher Spread: The market requires a higher spread due to a perceived increase in the risk that the issuer will default. - Bond Ratings: Companies that assign ratings to bonds will lower a bond’s rating.
Question: What do you mean by credit-spread-risk?
Answer: When there is a default risk on the bond, then there is more spread expected or the credit-spread demanded by the market, that is referred to as credit-spread risk. Like market require more spread in the bond which has default risk.
Question: What do you mean by downgrade risk?
Answer: If bond is rated low by rating agency then its called downgrading the bond and risk is referred to as downgrade risk.
Question: What is the role of rating agencies in case of default risk of a bond?
Answer: If you see a credit rating is a formal opinion given by a specialized company for the default risk of a bond. And these specialized companies are referred as rating agencies and provide ratings. There are three nationally recognized rating agencies in America they are Moody’s Investors Service, Standard & Poor’s Corporation, and Fitch Ratings.