When credit spreads are narrowing relative to government bonds, which type of bonds will tend to perform the best?

A. Government bonds
B. Higher-rated corporate bonds
C. Lower-rated corporate bonds

Correct Answer: C

When credit spreads are narrowing relative to government bonds, the spread between higher- and lower-rated bond categories also narrows. Corporate bonds will generally outperform government bonds, and lower-rated corporate bonds will tend to outperform higher-rated corporate bonds.