Which of the following describes the impact of interest rate changes on bond prices?

When considering the relationship between interest rates and bond prices, it is critical to understand the dynamics of bond valuation. Bonds represent contracts to pay a fixed interest rate over time. When market interest rates rise, new bonds are issued at these higher rates, making existing bonds that pay lower interest rates less attractive to investors. This decline in desirability leads to a decrease in the market price of existing bonds.

As investors seek to adjust their portfolios to capture the benefits of higher available rates, they would be less inclined to purchase bonds that offer lower interest payments, hence driving down the price of those bonds. This inverse relationship is a fundamental concept in fixed-income investing and is rooted deeply in the mechanics of how bonds are appraised based on their cash flow relative to current market conditions.

The other options are inaccurate descriptions of the relationship between interest rates and bond prices. For instance, the suggestion that bond prices would increase as interest rates rise contradicts the fundamental principles of bond valuation, while stating that bond prices are unaffected by interest rates ignores the essential market dynamics that maintain and affect bond valuations. Lastly, asserting that bond prices are only influenced by the bond's maturity overlooks other critical factors, including the prevailing interest rates in the market. Thus, the correct understanding is that bond