What typically happens to the price of a bond when interest rates decline?

When interest rates decline, the price of existing bonds typically increases. This relationship stems from the fixed interest payments (or coupon payments) that bonds provide. When interest rates in the market decrease, new bonds are issued at those lower rates, making existing bonds with higher rates more attractive to investors.

As a result, investors are willing to pay a premium for these existing bonds because they offer better returns compared to new issues. Thus, demand for the existing bonds goes up, which in turn drives their prices higher.

This concept illustrates the inverse relationship between interest rates and bond prices: when interest rates fall, existing bond prices rise, which is why the correct choice indicates that the price of a bond increases as interest rates decline.