How do changes in interest rates generally impact bond prices?

Changes in interest rates have a significant impact on bond prices, primarily due to the inverse relationship between the two. When interest rates rise, newly issued bonds come with higher yields to attract investors. Consequently, existing bonds, with lower yields, become less attractive. This causes the prices of these existing bonds to fall. Investors looking for better returns will not pay full price for lower-yielding bonds, leading to a decrease in their market price.

Moreover, this dynamic is essential for understanding the bond market and making informed investment decisions. For instance, if you already own bonds that pay a fixed rate of interest and the market interest rates increase, the opportunity cost of holding those bonds rises, prompting a drop in their market value.

In contrast, the other options reflect misunderstandings about how bonds and interest rates interact, failing to grasp this fundamental principle.