There's a global bond-market rout underway that has sent yields higher in recent weeks. How does that impact your fixed-income portfolio? Knowing the basic mechanics of this market has never been more important, so let's walk through it in seven easy steps.

1. First think about a borrower like the U.S. government or a big company. When they take out debt, they borrow a fixed amount of money that they promise to pay back in full at a future date. They often also promise to pay a certain rate of interest, which is known as the coupon.

2. Now imagine you bought a bond from this issuer at a value of 100 and it has a 6% coupon. Then think about what happens when the price falls to 98. Someone who buys it at that price is still earning the 6% coupon. But the bond will eventually be redeemed at 100. The combination of the coupon payment, plus the discount to the redemption price, is known as the yield.

3. The added gain from the discounted price means the yield, or overall return generated by the bond if held to maturity, will be higher than the coupon. So the yield on the bond, now worth 98, might correspond to a yield of about 6.27%. If you got the bond for 96, the yield might be about 6.55%, and so on. Conversely, if you bought the bond for more than its face value, say at 102, the yield would be less than the coupon.

4. If market rates are on the rise, as they have been in recent months, one of two things has to happen. Either issuers coming out with new debt have to increase the coupon they are offering to stay in line with yields. Or for already issued debt, the price has to adjust so the yield is comparable to other, competing issues.

5. The resulting fall in prices and rise in rates has been happening to trillions of dollars of bondholdings right now. For some, the decline in value defeats the purpose of owning the bonds. But that's not the end of the story.

6. The declining value of the bond only turns into a real loss if you sell the bond you bought for 100 at 98 or 96. If you hold the bond until the end of its life, and it doesn't default, you will get your money back, plus the interest you were promised. In that case, you are getting exactly what you were promised.

7. In the last example, the real cost of the drop in bond prices is an opportunity cost. You have tied up your money in lower-yielding bonds when, had you waited, you could have bought the higher-yielding ones.