Credit Strategy: Investing in Downgraded Bonds

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In the context of fixed income portfolio management, particularly credit strategies, investors often assess the creditworthiness of issuers to inform their investment decisions.

One common strategy is to focus on securities issued by companies that have been downgraded in credit ratings, as these may offer higher yields to compensate for perceived additional risk.

Based on this understanding, which of the following strategies best describes the approach of investing in downgraded bonds?

Investing in high-quality bonds to minimize credit risk.

Engaging in a risk arbitrage strategy by purchasing bonds that have been recently downgraded.

Investing in government bonds to achieve stable returns.

Hint

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