Which factor can affect bond prices?

The correct answer is the impact of interest rate changes on bond prices, which is a fundamental concept in the bond market. When interest rates rise, the prices of existing bonds typically decrease. This relationship exists because new bonds are issued at higher rates, making existing bonds with lower rates less attractive to investors. Conversely, when interest rates fall, the prices of existing bonds usually rise since they provide higher returns compared to new bonds issued at lower rates.

Understanding this dynamic is crucial for investors because it highlights how market conditions and monetary policy can directly affect the value of bond investments. Changes in interest rates are influenced by various factors, including economic growth, inflation expectations, and central bank policies, all of which can lead to fluctuations in bond prices.