Safe Corp. has a zero coupon bond with 10 years to maturity and a yield of 5%. Risky Company also has a zero coupon bond with 10 years to maturity, but the yield on the bond is 5.25%. The higher yield on the Risky bond reflects Risky's higher probability of default. Historically, the difference between the yields of the two bonds has been 1%. This difference is called the "yield spread." Today the yield spread is only 0.25%. You expect that the yield spread will widen back to its historic value over the next few days: Assume that both yields will change equally to bring the spread back to its historic position and that the mid-point of the spread will stay where it is. What positions do you take in the two bonds to profit from the expected changes? Olong the Risky bond; long the Safe bond short the Risky bond; short the Safe bond short the Risky bond; long the Safe bond Olong the Risky bond; short the Safe bond

Safe Corp. has a zero coupon bond with 10 years to maturity and a yield of 5%. Risky Company also has a zero coupon bond with 10 years to maturity, but the yield on the bond is 5.25%. The higher yield on the Risky bond reflects Risky's higher probability of default. Historically, the difference between the yields of the two bonds has been 1%. This difference is called the "yield spread." Today the yield spread is only 0.25%. You expect that the yield spread will widen back to its historic value over the next few days: Assume that both yields will change equally to bring the spread back to its historic position and that the mid-point of the spread will stay where it is. What positions do you take in the two bonds to profit from the expected changes? long the Risky bond; long the Safe bond short the Risky bond; short the Safe bond short the Risky bond; long the Safe bond long the Risky bond; short the Safe bond