1. 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.
2. A. What is the coupon impact of using a more risky reference entity? (high? lower? no change? Why?)
B. If the CLN carries a floating coupon (adjusts each quarter to changes in interest rates in general) what impact is there on the initial hedges and on risks? Presume that the buyer of the CLN only wants credit risk.