Explanation:
Statement II is the only correct statement as the bondholders and investors rely on the rating of the issue and the issuer, which is provided by rating agencies.
Statement I is incorrect because the credit spread risk, not the credit default risk, is the risk of financial loss or the underperformance of a portfolio that arises due to movements in the credit spreads used in the marking to market of bonds.
Statement III is also incorrect because, according to S&P and Fitch, a BBB-rated bond is considered an investment bond. All bonds that fall below BBB- are considered junk bonds.
Q.914 Pamela Simpson is the fixed-income investment manager at Nordend Investment Bank. During a seminar on the risks attached to fixed income assets, which was organized to train junior analysts, Simpson made the following statements about the credit default risk of bonds:
I. Credit default risk is the risk of financial loss, or the underperformance of a portfolio, that arises due to movements in the credit spreads used in the marking to market of bonds
II. Investors rely on rating agencies to evaluate the credit default risk of the issuer
III. According to S&P and Fitch, a BBB-rated bond is considered a junk bond
Which of these statements is/are correct?
A
Statement I is correct only.
B
Statement II is correct only.
C
Statements I & III are correct.
D
Statements II & III are correct.
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