QUESTION $4[25$ MARKS$]$

$$Fixed income investment can range from a buy and hold investment strategy to a

more active investment strategy in an attempt to seek alpha return from the bond

market. Each strategy has its own risks in achieving investors return expectations.$$

$($a$)$ Critically explain how an investor can generate a return under a passive bond

investment strategy compared to an active bond investment strategy.

$(5$ marks$)$

$($b$)$ With the economic uncertainties, the general expectations are for some issues to

experience a credit rating downgrade. Critically explain how you can use an active

investment strategy to optimize return based on credit rating changes of an issuer

using supporting examples.

$(10$ marks$)$

$($c$)$ Critically explain what other financial risks inherent in bond investment that should

be considered by an investor?

$(5$ marks$)$

$($d$)$ Explain under what conditions an investor is exposed to capital gains or losses for

an investment in fixed income instruments.

$(5$ marks$)$