Veltz: You are correct. Interest is the cost of borrowing or lending money. When you buy a bond, you are lending the issuing corporation/government/entity cash, and they pay you interest. So, if you invested in a 10-year, 1,000 bond with a 3% yield, or roughly $30/year interest, but then interest rates go up to 5%, your previously-purchased bonds go down in value, because now you could make $50/year in interest. Stocks are the best hedge against inflation, because when growing, they are better than bonds.
iHear: Put some money in bonds, but leave some money in the stock market, especially if you put it into some Vangaurd mutual funds.