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Answer: The price of Bond X is currently higher than the price of Bond Y.
## Explanation This question tests understanding of bond spreads and their relationship to bond prices. **Key Concepts:** - **Bond Spread**: The difference between a bond's yield and the yield of a comparable Treasury bond - **Spread and Price Relationship**: Higher spread = higher yield = lower price (inverse relationship) **Analysis of Options:** - **Option A**: Incorrect. Bond X's 30 bps spread means it earns a HIGHER return than the comparable Treasury bond, not lower. The spread represents additional compensation for risk. - **Option B**: **CORRECT**. Since both bonds have the same maturity and coupon rate, the bond with the lower spread (Bond X at 30 bps) will have a higher price than the bond with the higher spread (Bond Y at 70 bps). This is because lower yield = higher price. - **Option C**: Incorrect. The 70 bps spread is already incorporated into Bond Y's yield. The statement suggests adding it again, which would be double-counting. - **Option D**: Incorrect. Spread differential (40 bps) does not directly translate to a 0.4% price difference. The price difference depends on the bonds' duration and other factors. **Conclusion**: Bond X trades at a tighter spread (30 bps) than Bond Y (70 bps), indicating Bond X is perceived as less risky and therefore commands 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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