Question

For each statement, state whether you believe the statement is true or false. Provide a brief explanation of your reasoning.

a) An increase in income taxes will decrease the yield to maturity of municipal bonds.

b) The duration of a zero coupon bond will always be less than “n”, its yield to maturity.

c) If the yield to maturity on a bond increases, its duration will decrease.

d) If a Canadian company sells bonds in Mexico that are denominated in Canadian dollars, they would be called Eurobonds.

Answer 1

a. True

(This is because the return on the bond will become taxable at a higher rate of interest)

b. False

(The two terms are differnt. Duration of a zero coupon bond is equal to its time to maturity. YTM in the return obtained from the bond)

c. True

(YTM and duration are inversely related. Higher the duration, lower the YTM due to higher risk involved and vice versa)

d. False

A eurobond is a bond denominated in a currency not native to the issuer's home country. Since the bonds are issued in canadian dollars which is the issuers currency, they are not Eurobonds