But it’s more complicated because the current trading value of a bond is not the same as the expected return you’d get if you hold it to maturity. Last year Silicon Valley Bank and others got into trouble for this reason.
Let’s say you invested $100M into a 10-year bond when interest rates were at 2%. With interest, you’ll be getting back about $122M in ten years. Nice.
But what if you’re a bank and suddenly every depositor wants to withdraw that $100M? You can’t wait ten years. You need to sell the bond. Now you face the problem that interest rates are at 4%. Somebody with $100M can invest it in a 10-year bond that will return $148M instead of your measly $122M. So nobody will pay full price for your 2% bond because they can get a better return elsewhere.
But it’s more complicated because the current trading value of a bond is not the same as the expected return you’d get if you hold it to maturity. Last year Silicon Valley Bank and others got into trouble for this reason.
Let’s say you invested $100M into a 10-year bond when interest rates were at 2%. With interest, you’ll be getting back about $122M in ten years. Nice.
But what if you’re a bank and suddenly every depositor wants to withdraw that $100M? You can’t wait ten years. You need to sell the bond. Now you face the problem that interest rates are at 4%. Somebody with $100M can invest it in a 10-year bond that will return $148M instead of your measly $122M. So nobody will pay full price for your 2% bond because they can get a better return elsewhere.