This chart shows the iShares 1-3 Year Treasury Bond ETF (SHY). The prices shown are the adjusted closing prices for each trading day. The "adjustments" are made for interest paid by the bonds, reducing the prices of the SHY shares more and more as you look back further in time. The net effect is that this chart shows the combined effect of capital gains and interest paid.
Treasury Bonds are considered the safest investment in the world, as the US government guarantees the full amount of the principle will be paid if the bond is held to maturity. And short term bonds, like those held by SHY, are especially safe, since they will mature in only a few years. A steady stream of interest payments helps to make them a very desireable investment, especially for those in retirement, or as a hedge against the many risks of stock investing. As expected, the dollar value of these bonds has risen gently over the years, reflecting the stream of interest payments and capital gains (as interest rates have fallen since 2008, the value of the underlying bonds has increased.)
But the falling value of the dollar has devastated the true value of bonds, as you can see on the chart. Of course the government promises to pay back the full face value of each bond, and they can certainly do so – by printing the money if necessary! You will get every dollar coming to you – but what will those dollars buy? The answer is that to buy $1,000 of SHY shares in 2002 would have required the sale of about 102 grams of gold. In August of 2010, those shares could be sold for about $1,035, and you would have collected about $191 in interest, for a total value of $1,226 – apparently a 22.6% gain. But that $1,226 would buy you only 31.6 grams of gold, for a real net loss of 69%.
Don't get trapped in these deadly investment situations. We live in a funhouse economy where all values are distorted by the constantly changing value of the units of account – the government issued and controlled currencies in use all over the world. To make sound decisions, you need to have a unit of account that you can trust, and you need a place to store your savings that won't be ravaged by government manipulations.
