Isn’t Statement 1 Incorrect?
When credit migration happens- the Risk and CVA on the bond increases and hence we realize higher return for higher risk.
But Solution says that only Statement 2 is incorrect
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They’re looking at it from the point that you’re holding the bond. So if migration happens, it’s downgraded, Price of the bond falls, return falls.
Can this be thought like this? A person generally wants to reduce his credit spread but reduced credit spread results in lower returns most often. That is why the statement is correct that credit spread migration “often” reduces the expected return.