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Answer: The price of Bond X is currently higher than the price of Bond Y.
## Explanation **Correct Answer: B** **Analysis of Options:** - **Option A**: Incorrect. A higher spread means a higher yield, which means a higher return compared to Treasury bonds, not lower. Bond X's 30 bps spread means it earns 0.30% more than comparable Treasuries. - **Option B**: **Correct**. Since both bonds have the same maturity and coupon rate, but Bond X has a lower spread (30 bps vs 70 bps), this means Bond X has a lower yield. For bonds with the same coupon and maturity, a lower yield means a higher price. Therefore, Bond X's price is higher than Bond Y's price. - **Option C**: Incorrect. The spread is already incorporated into the bond's market price. Adding 70 bps to the Treasury yield would not equate the present value to face value - it would actually make the present value lower than the market price. - **Option D**: Incorrect. The 40 bps spread differential (70-30) does not directly translate to a 0.4% price difference. Price differences depend on the bond's duration and other factors, not just the spread differential. **Key Concept**: Bond spreads represent the additional yield over risk-free rates. For bonds with identical characteristics, a lower spread means a lower yield, which translates to a higher price.
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A portfolio manager is considering two bonds, Bond X and Bond Y, with the same maturity date and coupon rate. The dealer informs the manager that Bond X trades at a spread of 30 bps over the Treasury market, while Bond Y trades at a spread of 70 bps. Which of the following statements is a correct conclusion for the manager to make?
A
Bond X earns a lower return than that of the comparable Treasury bond, since its spread serves to increase the discount rate of its cash flows.
B
The price of Bond X is currently higher than the price of Bond Y.
C
To equate the present value of Bond Y's cash flows to its face value, 70 bps would need to be added to the yield to maturity of a Treasury bond with comparable maturity.
D
The spread differential indicates that there is a 0.4% difference in price between Bond X and Bond Y.
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