dandman

Floyd, I have not done this reading yet, but i will attempt to answer your first question.
Suppose, a treasury bond is yielding 4% and is selling at par (say $100). Also, there is a corporate bond yielding 6% also selling at par (say $100).
So, if you sell treasury bond and buy corporate bond, you will earn the 2% difference in yields. (ofcourse, this is because you are taking on the credit and liquidity risk associated with that corporate bond). So, if the conditions dont change, you continue to earn this difference of 2%, till the time you close your positions.
Now, lets say, market conditions have changed. Investors have become more risk averse and the credit spread has increased. Which means, people are now expecting more yield from corporate bond wrt treasury bonds. With increased credit spread and increased yield on corporate bond, corporate bond price will fall and leaves you with capital loss when you close your position.