The Historical Yield Spread Between the AA Bond and the AAA

question 65

Multiple Choice

The historical yield spread between the AA bond and the AAA bond has been 25 basis points. Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels, you should ________.

• A) buy the AA and short the AAA
• B) buy both the AA and the AAA
• C) buy the AAA and short the AA
• D) short both the AA and the AAA

---

Definitions:

Peak Efficiency

The state of operation where a system or process achieves its maximum productivity with minimal waste and effort.

Break-Even Point

The point at which total costs and total revenues are equal, resulting in no net loss or gain for the business.

Long Run

In economics, the long run refers to the period during which all factors of production and costs are variable, allowing for full adjustment to changes in the market or economy.

Minimum Price

A minimum price is a legally imposed threshold set above the equilibrium price, below which a certain good or service cannot be sold, often to protect producers.