Rainbows

The sun sends out waves of white light. When this white light enters a droplet of water, it diffracts into the different colors. The white light diffracts because each color refracts at a different angle. For example, red refracts at 42 degrees, and violet refracts at 40 degrees. Because each color refracts at a different angle, each color must come from a certain angle towards your eye. Due to this, rainbows are a cone with its apex at your eye. However, the horizon generally gets in the way. This is why the rainbow appears as an arc. However, if you look from a high point like an airplane or mountaintop, you can see a rainbow circle on the cloud layer below you.

Example of refraction in a raindrop: http://www.phy.ntnu.edu.tw/java/Rainbow/rainbow.html

Sources:

Patterns in Nature. 26 December 1999. Arizona State University. 2 March 2008. <http://acept.la.asu.edu/PiN/rdg/rainbow/rainbow.shtml#top>
How Stuff Works 2006. How Stuff Works. 2 March 2008 <http://www.howstuffworks.com/question41.htm>.