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Getty Images At some point, the party is going to end: Interest rates are currently at unsustainably low levels — levels not supported by natural supply and demand, but by the Federal Reserve’s aggressive policies.

Higher rates are generally good for people looking to put new money to work in the bond market. But what about those already invested in bonds?

As Dan Caplinger recently pointed out here on DailyFinance. this is an extraordinarily risky time to be in the bond market. If you’re holding onto bonds right now, when rates rise, the price of existing bonds will drop. And that, in turn, will knock out much — if not all — of the safety the bond buyers thought they were getting by buying them in the first place.

Just how far will prices fall?

While all standard, fixed-coupon bonds will fall when interest rates rise, each will fall a bit differently based on what’s known as its modified duration. It’s a formula, available in Microsoft Excel and online calculators like this one that figures out how many percentage points the price of a bond will drop for a one percentage point increase in interest rates.

The bigger the modified duration, the bigger the risk.

When $100 Is Only Worth $90.60

U.S. Treasury Bonds are a potent example of this danger in action. As of this writing, the longest-dated U.S. Treasury Bond matures in November 2042 — nearly 30 years from now. When those were issued last November, interest rates were even lower than they are today. Those bonds have a coupon rate of 2.75 percent, but their current yield to maturity is closer to 3.25 percent.

A half point rise in rates may not seem like a very big deal, but those bonds have lost nearly 10 percent of their market value on that tiny move. What was issued as a bond with a $100 face value can be picked up in the market for about $90.60.

Oh sure, Uncle Sam still guarantees that investors will get back the full $100 — in 2042 — and $2.75 a year in interest payments while they wait. But that guarantee is cold comfort for those who’ve just seen the value of more than three years’ worth of those interest payments vanish in just a few months on a mere half-point rise in rates.

Running the Numbers

Indeed, calculating the modified duration of investment grade bonds from well-known issuers, the numbers right now can be a bit scary. The table below shows the gory details: