Ric Edelman: Hi! I am Ric Edelman, ranked the number one independent Financial Advisor in the nation by Barron's.

Today, we are talking about bonds and interest rate risk. Interest rates and bond prices have an inverse relationship, when one rises, the other falls. Think of a see-saw, one side goes up the other side goes down.

Now in normal times, investors debate about whether interest rates will rise or fall but these days there is no debate, because interest rates are near zero. So, most people have concluded that rates are destined to eventually go back up.

Of course, no one knows when that might happen, it could take months, even years but eventually, it's reasonable to assume that rates will rise. And when that happens, bond values will fall. Why? Oh, you can thank the simple law of supply and demand.

Say the government issues a 1% bond and you buy it. Later, say that the government raises rates to 2% and you decide to sell your bond. Well, would an investor rather buy your bond at 1% or the new ones that pays 2%?

Clearly, the 2% bond would be the better choice. So in order to find a buyer for your bond, you would have to lower your price. How much lower? Well, it's based on a calculation called duration and you could lose as much as 7% for every 1 point increase in interest rates. That's for a bond with a seven year duration.

So if interest rates go up 3%, that bond's value could fall by 21%. So you see bonds aren't quite as safe as you may have thought.

In our next video, we are going top take a look at credit risk and how that can also impact your bond's value.