Final answer:
The correct statement is that bonds may be retired at maturity or retired early. There is no requirement for bonds with a rising effective interest rate to be retired early; that decision is up to the issuer. The value of existing bonds typically falls when market interest rates rise.
Step-by-step explanation:
The correct statement is: Bonds may be retired at maturity or retired early. Issuers of bonds are under obligation to repay the principal, also known as the face value, on the maturity date, and they have the option to retire the bond early if they so choose. Whether to retire a bond early often depends on various factors such as interest rate fluctuations and the issuer's financial strategy.
Contrary to the belief that bonds with a rising effective interest rate must be retired early, it is not a requirement. The decision to retire bonds early is at the discretion of the issuer and may be influenced by potential savings on interest payments versus the cost of early retirement, among other strategic considerations.
In the financial market context, bond yields and interest rates generally have an inverse relationship. When market interest rates increase, the value of existing bonds typically decreases because new bonds would be paying higher rates, making older bonds with lower rates less attractive. Hence, the value of bonds decreases when interest rates rise, reflecting the inverse relationship between bond prices and market interest rates.