Trying to fully understand how Treasure Bonds value is diminished when federal interest rates rise.
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Lets say a bond pays 5%. If I buy a bond for 1000 dollars, I get 50 bucks in interest.
I can sell it for about 1,000 anytime. New bond paying 5%, my bond paying 5%. They are basically the same, so somebody buying a bond on the market would be happy to have either one.
Now let’s say interest rates rise to 7%. I can’t force the existing bond to pay more. But I can sell my bond at a lower price.
Lets say I sell it to you for 750.00. The bond still pays 5%, based on its original sale price of 1k, so it pays 50 dollars in interest.
Since you only paid 750, and you are getting 50 bucks, you are getting about 7%. You did this by agreeing to a lower sale price on the bond. If I won’t lower my price that much, nobody buys it. I’m free to hold my bond until maturity, unless you need the money right now (like for example, you are operating a bank, and there is a run on your bank)
(I’ve over simplifying many concepts to make it easier to understand. There is a lot more involved, like how long until the bond matures. So the actual math is a bit more complicated, but the concept is the same. I cannot force the bondholder to raise or lower interest, but I can raise or lower my sale price of the bond to give you similar interest rates.
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