The inline formatting model is extremely complicated.
In your example you set the yellow background on the parent block element but you changed the background color on the child inline element whose background only stretches as far as the "content area" of that inline element.
The background of an inline element does not include it's line height.
If you applied the yellow background to the anchor to start with you would see that only the content area (the font size of the element) is covered.
If you float the lists or make then display:block then they take on the full height of the parent.
It's basically the difference between inline and block elements again.
The vertical padding, border and margin of an inline, non-replaced box start at the top and bottom of the content area, not the ['line-height'. But only the [URL="http://www.w3.org/TR/CSS2/visudet.html#propdef-line-height"]'line-height'](http://www.w3.org/TR/CSS2/visudet.html#propdef-line-height) is used when calculating the height of the line box.