Paper Loss

• When a bond drops in price because of rising interest rates, an investor will show a paper loss, but if he holds the bond to maturity, he will get back the full face value, so the loss is temporary.
  
  

Permanent Loss

• Bond funds have no maturities. When an investor sells a bond fund, the fund sells bonds and returns the money to the investor. It no longer owns the bonds so it can't get back the full face value at maturity. The bond fund loss (and that of the bond fund investor) becomes permanent.
  
  

Leverage

• Some bond funds borrow money to increase investor returns. Under normal circumstances, the short-term rates at which they borrow are lower than the interest they collect on the long bonds. But when interest rates rise, short-term interest rates may rise faster than long-term interest rates, so the fund may end up paying more in interest than it collects, magnifying investor losses.