Lists (bullet points or numbered): Highlight an individual word, and select the formatting as Code. Only the highlighted word will be changed - the text before and after the highlighted word remains as it was. This is what I would expect.

Paragraphs: Highlight an individual word, and select the formatting as Code. The entire paragraph will be formatted, not just the highlighted word.

The behaviour should be consistent. I think that applying the formatting only to the highlighted text is most intuitive.