Yes, if interest rates rise, say 3%, the resale value of bonds you buy today will go down. E.g. You buy a 10 year treasury with a 2% yield. Five years from now, you’d like to sell it but now investors are buying 5 year bonds for prices that give them a 5% yield. No one will bite on your bond with a 2% coupon when they could buy someone else’s bond and get a 5% coupon. So to sell your bond you must lower the price until the NPV of the cash flows from your bond equals the NPV of competitors’ bonds.

You can use the PV formula in Excel to calculate the price of your bond at a new rate. Instructions here:

https://www.extendoffice.com/documents/excel/5088-excel-calculate-bond-price.html Or use an online calculator.

In a nutshell, if rates rise, bond investors will lose quite a bit of market value. The impact would be greater than the financial crisis of 2008, because the overall bond market is many times larger than the mortgage market, and because bond portfolios are so often used as collateral. If I thought rates were going to rise 3%, I would RUN from the markets.

The confusing thing to wrap your mind around is that you lose money whether you sell your bond or not. In the example above, by holding your bond with a 2% coupon, you forego the opportunity to invest those funds at 5%. The losses you think you avoided by not selling equal the losses experienced by missing out on the higher interest rate. The markets are absolutely mathematically efficient on this point. Had interest rates fallen, you would be sitting on capital gains.

When you invest in a bond fund, that fund is constantly trading to maintain their targeted duration or sensitivity to changes in interest rates, and meanwhile the market is pricing the fund based on the value of its holdings. So the value of the fund changes just like any of its holdings.

You can keep your interest rate risk low by maintaining short durations. However this risk reduction comes at the risk of losing the opportunity to lock in today’s rates, when rates might be even lower in the future!