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Ch.2 · Advantages and Limitations of Mutual Funds · hard

What is a Credit Risk Fund?

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EXPLANATION

A Credit Risk Fund must invest minimum 65% in below AA-rated instruments (AA- and below). By taking on higher credit risk (risk of issuer default), these funds aim to earn higher yields than funds investing in higher-rated bonds. They carry significant credit risk.

A.A fund that assesses and manages credit risk for corporate borrowers

B.A debt fund that invests minimum 65% in below AA-rated corporate bonds to earn higher yields [✓ Correct]

C.A fund that hedges credit risk using credit default swaps

D.A debt fund that invests only in AAA-rated bonds to minimise credit risk

EXPLANATION

A Credit Risk Fund must invest minimum 65% in below AA-rated instruments (AA- and below). By taking on higher credit risk (risk of issuer default), these funds aim to earn higher yields than funds investing in higher-rated bonds. They carry significant credit risk.

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