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Question:

Consider the following statements:
Statement 1: The drawback of credit‐linked bonds is that they can contribute to further downgrades or eventual default of the issuer.
Statement 2: TIPS offer investors a fixed real return that is protected from inflation risk.
Which of the following is most likely?

A Both statements are correct.
Explaination

Because a rating downgrade results in higher interest payments on credit‐linked bonds, they can contribute to further downgrades or even an eventual default of the issuer. Treasury Inflation Protection Securities are inflation‐linked bonds. They are long-term assets with a fixed real return that is protected from inflation risk.