Optimal Credit Strategy for Corp Bond Investment

Very Hard Managing Fi Portfolios Credit Strategies

A fixed income portfolio manager is assessing a potential investment in a new corporate bond issued by a mid-sized company, FlashTech Corp., rated BB. The bond has a current yield of 5.5% and a duration of 4 years. The manager is particularly concerned about the company's recent increase in leverage and the potential impact of rising interest rates on its financial health. To better understand the scenario, the manager decides to consider different credit strategies in relation to this investment.

Among various approaches, the manager is contemplating a pure credit strategy focused on capturing credit spread movements, an active duration management strategy, or a distressed debt strategy, as economic conditions become more challenging. Given these circumstances, what would be the most suitable approach to maximize return while managing risk in this context?

Implement a distressed debt strategy, focusing on bonds that are trading below par.

Adopt an active duration management strategy to hedge against interest rate risk.

Engage in a pure credit strategy to capture potential credit spread improvements.

Hint

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