Final answer:
The market price of a bond increases when the interest rate decreases and decreases when the interest rate increases.
Step-by-step explanation:
The market price of a bond increases when the interest rate decreases and decreases when the interest rate increases.
For example, let's say Ford issues bonds with an interest rate of 3%. If the market interest rate rises to 4%, investors can find other bonds that offer a better return, making Ford's 3% bond less attractive. To entice investors to buy Ford's bond, the bond price will need to be lowered below its face value of $1,000.
Hence, when market interest rates rise, the value of a bond decreases, reducing its market price.