If a bond has a low credit spread, what can be inferred?

• A. Lower risk
• B. Higher risk
• C. The spread is irrelevant
• D. It implies higher price volatility

Answer: (C)

A low credit spread means investors require less extra yield to compensate for the issuer’s default risk, so the market is pricing in lower credit risk for that bond relative to a risk‑free benchmark. In other words, the issuer is viewed as safer, so the credit risk premium attached to the bond is smaller.

This isn’t irrelevant information—the spread directly reflects credit quality. It doesn’t automatically indicate higher price volatility; volatility is mainly driven by interest rate movements, duration, and liquidity. So the key takeaway is that a low spread signals lower credit risk, not higher risk or higher volatility by itself.