How do rising inflation rates typically affect bond prices and the associated credit risk for investors?

Rising inflation rates usually lead to higher interest rates, which can cause bond prices to fall. This happens because when new bonds are issued with higher interest rates, existing bonds with lower rates become less attractive to investors. For example, if you have a bond that pays 3% interest and new bonds are available that pay 5%, people will want the new bonds, so the price of your bond decreases. Additionally, higher inflation can increase credit risk for investors, as companies may struggle to pay back their debts if costs rise faster than their income. In summary, as inflation goes up, bond prices tend to go down, and the risk of default may increase for some borrowers.