In the year 1157, the Republic of Venice was in the midst of war and in desperate need of funds.
It wasn't the first time in history that a government needed to borrow money to fight a war. But the Venetians came up with an innovative idea:
Every citizen who loaned money to the government was to receive an official paper certificate guaranteeing that the state would make interest payments.
Those certificates could then be transferred to other people… and the government
In this way, the loan that an investor made to the government essentially became an asset– one that he could sell to another investor in the future.
This was the first real government bond. And the idea ultimately created a robust market of investors who would buy and sell these securities.
When a government's fortunes changed and its ability to make interest payments was in doubt, the price of the bond fell. When confidence was high, bond prices rose.
It's not much different today. Governments still borrow money by issuing bonds, and those bonds trade in a robust marketplace where countless investors buy and sell on a daily basis.
Just like the price of Apple shares, the prices of government bonds rise and fall all the time.
One of the most important factors affecting bond prices is interest rates: when interest rates rise, bond prices fall. And when rates fall, bond prices rise.