A bond is essentially a loan made by a lender (considered to be an investor) to a borrower who is typically a corporation or a government entity.
The interest rate paid for the loan is locked in for a period of time and is determined by various market factors. The two components of risk related to investing in a bond are the interest rate risk and the default risk.
Lenders and borrowers are diametrically affected when interest rates change. Lenders who are locked in at a fixed rate for a period of time want the rates to stay the same or go down.
If you are a borrower, you don’t mind if they go up, because you are locked in at a lower rate. Because interest rates are continually changing, the value of the loans also changes, having a direct opposite effect on the lenders and borrowers.
To mitigate the effect that interest rates have on a lender, a loan may be structured with a variable interest rate,