What signifies an increase in a company's credit risk?

An increase in interest rates applied to loans typically signifies a higher credit risk associated with a company. When a lender perceives that a borrower has a greater risk of defaulting on their obligations, they often respond by increasing interest rates. This is intended to compensate for the added risk taken on by the lender; higher interest rates act as a risk premium for lenders.

In this context, if a company's credit risk increases, creditors will demand higher returns for the additional risk they are taking by lending to that company. Consequently, higher interest rates can signal to investors and analysts that the company's financial health or risk profile has deteriorated, making it essential to recognize this linkage between elevated loan rates and increased credit risk.

The other options reflect situations that would typically indicate a reduced risk profile rather than an increase in credit risk. For example, higher credit ratings and improved financial metrics generally demonstrate that a company is viewed as a safer investment, while lower bond yield percentages often correlate inversely with perceived risk, indicating that investors are more willing to accept lower returns for safer investments.