Which of the following statements is true of bond prices?
a. a fall in interest rates causes a fall in bond prices.
b. a fall in bond prices causes interest rates to fall.
c. a rise in interest rates causes bond prices to fall.
d. bond prices and interest rates are not connected.

C. A rise in interest rates causes bond prices to fall

Explanation:

There is an inverse relationship between interest rates and bond prices. The higher rate of return (or yield) required, the lower the price of the bond, and the lower yield required, the higher the price of the bond.

The inverse relationship is because most bonds pay a fixed interest rate. Therefore, if interest rates in general fall, the bond's interest rates become more attractive, so people will bid up the price of the bond thus increasing the market value of the bond.

Similarly, if interest rates rise, people will no longer be interested in the lower fixed interest rate paid by a bond, causing the price of the bond to fall.

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