Bonds fluctuate in value primarily because interest rates fluctuate. When the bond is a direct obligation of the U. S. Government, interest rate fluctuation is the only reason for its fluctuation in value.
We all are aware of the fact that when we purchase a bond we are loaning our money to the issuer of the bond. Our compensation comes in the form of two guarantees. First: the issuer guarantees that we will receive a fixed rate of interest to be paid at regular intervals during the duration of the bond and second: The issuer guarantees that at maturity we will receive our money back.
From the date of issue until the maturity date the value of the bond will rise if interest rates fall or the value will fall if interest rates rise. For instance: If you bought a bond that guaranteed you 4% per year for a five year duration and should you suddenly find yourself in need of that money after two years you can sell that bond. But, you would either suffer a loss or enjoy a gain from your original purchase price. At the time of sale if the open market interest rate on other bonds with a similar maturity date happened to be 3% you could demand a premium over the price you paid because of the higher income being received on your bond. However, if the open market rates were 5% at the time of your sale you would have to accept a discount from the price you paid in order to compensate for the lower income of your security.
A guarantee is only as good as the entity issuing the bond. In the case of a direct obligation of the U. S. Government there is zero risk that you will fail receive your interest payments promptly and receive your money back on maturity.
In the case of other entities who issue bonds we are presented with another layer of risk. How likely are they to reliably meet their interest payments in a prompt fashion and how likely are they to return your money at maturity?
The good news is that the free marketplace fairly accurately determines that risk for us by the premium of the interest rate offered to the buyer over and above that of an equivalent government security. If the government security pays 4% and XYZ Corp pays 4.5% one can see that the risk is minimal. On the other hand should Fly-By-Night Corp. pay 10% for an equivalent security you can assume there is big time risk no matter what the CEO of Fly-By-Night Corp. tells you.
Obviously the longer the duration there is on the bond the more risk one is accepting simply because lots of things can happen to interest rates over a long period of time. And, lots of thing could happen to a corporate entity, favorable or unfavorable, over a long period of time.
Fluctuation of the value of bonds is a concern only if you think you may need your money before maturity. If you are sure that you won’t need those funds until after maturity and you are comfortable with the issuer you can rest easy.