QUESTIONS 97 THROUGH 108 RELATE TO FIXED INCOME INVESTMENTS.

100. A bond portfolio manager is considering three Bonds – A, B, and C – for his portfolio. Bond A

allows the issuer to call the bond before stated maturity, Bond B allows the investor to put the

bond back to the issuer before stated maturity, and Bond C contains no embedded options. The

bonds are otherwise identical. The manager tells his assistant, “Bond A and Bond B should have

larger nominal yield spreads to a U.S. Treasury than Bond C to compensate for their embedded

options.” Is the manager most likely correct?

A. Yes.

B. No, Bond A’s nominal yield spread should be less than Bond C’s.

C. No, Bond B’s nominal yield spread should be less than Bond C’s.