What is generally the relationship between bond prices and a company's credit rating?

The relationship between bond prices and a company's credit rating is characterized by the fact that as the credit rating of a company improves, the prices of its bonds typically rise, and conversely, if the credit rating declines, the prices of its bonds tend to fall. This is due to the perceived risk associated with lending to the company.

When a company has a high credit rating, it indicates a lower risk of default, leading investors to demand a premium for these safer investments, thus driving prices higher. On the other hand, if a company's credit rating is downgraded, it signals increased risk, prompting investors to sell or avoid those bonds, which pushes their prices down.

This dynamic illustrates the inherent market sentiment regarding risk and reward associated with bond investments, where higher credit ratings correlate with higher bond values, thus solidifying the connection noted in the correct answer.