This will reduce your IRA balance and dramatically decrease your required minimum distributions. I know I should have bonds in my account for diversification, but I really don't understand how they work. A bond is essentially a type of loan between one party and another. Bonds are typically issued for a set period of time and carry a fixed interest rate, payable semiannually. Bonds are traded in the open market much like stocks.
Prices fluctuate based upon supply and demand.
If investors believe that inflation is becoming an issue, they might demand a higher interest rate on their money. They would pay a lower price. As investors demand higher interest rates, they'll bid the prices of bonds down. And as they'll settle for lower interest rates, they'll bid the prices of bonds up. It is the open market of buyers and sellers of bonds that determines interest rates.