Hey dad, my bond is worth way less money today than it was yesterday. Yep, why? Well, what interest rate was your bond paying? 2%. Okay, well now their bond's paying 5%. So what? So nobody's gonna spend a thousand bucks today to get a bond paying 2% when they could spend that same thousand bucks and get a bond paying 5%. But why did it drop in price? Because if you sell that bond today and it's only returning 2%, then you have to make up for the difference between that 2% and what investors think they could get elsewhere. So you would have to sell your current bond at a discount. So I've lost money? No, you can hold the bond you have right now until maturity and get the thousand dollars back plus the 2% return. That never changes. But if you wanna sell the bond today, you need to give the buyer an additional incentive to do so beyond the 2%. Oh, that makes sense. Really? Well, no, but you tried your best.

Learn how interest rates impact bond prices and what it means for your investments in this easy-to-understand discussion about bonds and their value changes.