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CFA Level 3 - Fixed Income - Fixed-Income Active Management: Credit Strategies
Intermediate
1/5
Tom, a fixed-income portfolio manager, is evaluating a bond issued by a company in the manufacturing sector. The bond has a remaining maturity of 6 years and is rated BBB by credit rating agencies. The company's debt-to-equity ratio has increased from 1.6 to 2.3 over the past year, and its interest coverage ratio has declined from 4.5 to 3.2. The bond is currently trading at a yield of 4.8%, which is 160 basis points above the benchmark Treasury yield. The company has recently announced plans to modernize its production facilities, which could lead to increased capital expenditures and higher debt levels. Given these credit risk factors, what is the most appropriate action for Tom to take in managing his portfolio?
a.
Maintain the current position in the bond, closely monitoring the company's financial performance and credit metrics, and be prepared to adjust the holding if the credit profile deteriorates further or if the modernization plans do not yield the expected benefits in terms of efficiency and profitability.
b.
Increase the portfolio's allocation to the bond, as the higher yield compensates for the increased credit risk, and the company's modernization plans could lead to improved financial performance in the long run.
c.
Reduce the portfolio's exposure to the bond by selling a portion of the holding and reinvesting the proceeds in bonds with stronger credit profiles.
Intermediate