What does a positive spread between the yield on a corporate bond and the risk-free rate indicate?

A positive spread between the yield on a corporate bond and the risk-free rate indicates that investors demand a premium for assuming additional risk associated with corporate bonds compared to risk-free investments, typically represented by government securities. This spread reflects a greater perceived risk associated with the corporate bond, as it signals that investors expect to receive extra compensation (i.e., a higher yield) for the uncertainty connected to the issuer's financial health and the potential for default.

When comparing yields, a wider spread generally suggests that investors are wary of potential issues with corporations' ability to honor their debt obligations, leading them to require higher returns on corporate bonds than what they would expect from safer alternatives. This understanding aligns with risk-return principles in finance, where higher risk is often correlated with the need for higher expected returns to justify that risk.

Thus, the correct answer highlights the market's perspective on the risk associated with corporate bonds relative to risk-free investments.