Financial Risk Manager Part 1
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A bond fund manager has requested quotes from a bond dealer on 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.