Say you buy a bond for $100 with 10-year maturity. This means the bond will pay $100 in 10 years. What is it worth today? Let's say you are looking for an inve

Say you buy a bond for $100 with 10-year maturity. This means the bond will pay $100 in 10 years. What is it worth today? Let's say you are looking for an investment to pay 1% yield year over year, because that's the going market rate (which highly correlates to interest rates). Then this bond should be worth about $90.53 to you. You buy it at that price. Now suddenly rates change and everyone is expecting investments to pay 3% year over year. Then an equivalent bond is now worth only $74.41. That's OK. You don't have to sell your bond. You can hold on until it matures, and just live with the fact that you aren't getting the same yield as others. But now imagine you need to come up with a lot of money quickly to satisfy some requirement (like customers withdrawing a lot of money). Now you have no choice but to sell your bond. And that means you have to admit you lost the money. And now you may not have enough money to cover your obligations, even though you would have if you could have waited for the bond to mature.