Question about U.S. bonds?

Question

If bonds are you loaning money to someone (the govt.for example), and you know the interest rate that u'll get the principal + interest with in a few years, then HOW DO PEOPLE LOSE MONEY IN BONDS?

what makes bonds risky if its fixed interest rate? Maybe this defintion is not really correct, so help me!

Thanks

Answer 1

Bonds are issued by the U.S. Treasury and then redeemed by the Treasury at some future date for principle and interest.

Between issuing and redeeming the bonds, they can be traded on the secondary market, i.e. private bond holders can buy and sell these bonds with each other.

As economic conditions fluctuate, the interest rate investors demand from U.S. Treasury securities changes. Because the value the Treasury will pay at the end of the bond's term is fixed, the change in interest rate is reflected as a change in the bond's trading value.

Here's an example. Say you buy a 1 year bond that will be worth $110 in a year's time. It pays 10%, which means you buy the bond for $100.

Six months later, that bond has earned half of the interest it will earn over the full year's term, so it should be worth $105 if you sold it on the secondary market. But if interest rates have changed it may be worth more or less. Say investors now demand a 12% return on their investment. In order for an investor to earn this return for the second 6 months of the bond's term, he could pay only $103.77 for that bond.

Any time you do not hold a bond for its full duration you run the risk of losing (or gaining) money beyond the stated return of the bond.

Answer 2

No risk, as long as US is here. The interest is not very high and does not reflect inflation.