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QUESTION 4[25 MARKS] Fixed income investment can range from a buy and hold...

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Accounting

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)

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