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8. Bond basics

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1. are/are not
2. revenue/serial/obligatory/project
3. only if the project generates sufficient revenue/regardless of the revenue generated by the project
4. lower/higher
5. free form/subject to
6. worse/better
7. lower/higher
8. call fee/repayment premium/recall fee/call premium

Understanding How Bonds Work as Investment Vehicles From an investment point of view, bonds are generally considered to be safer investments than stocks. They are generally low risk low return investments, unlike stocks. As an investor in bonds, you would lend money to the issuer of the bonds. It is important to understand what bonds are and how they work as investment vehicles. Suppose a friend of yours is looking to invest $1,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about municipal bonds but wants to learn more before purchasing them. Fill in the blanks in the following conversation to give your friend the appropriate information regarding municipal bonds. FRIEND: Can you explain to me the basics of how investing in a municipal bond will increase my current income? YOU: Under a standard bond agreement, if you were to purchase a 10-year, $1,000 municipal bond with a 3% coupon, you would receive in interest each year, and at the end of the 10-year period, you would receive the par value or FRIEND: OK, and am I guaranteed to receive these interest payments and the par value? guaranteed by the YOU: Well, that depends. Within the category of municipal bonds, there are both general obligation bonds, which are not municipality, and bonds, which fund specific projects and are repaid FRIEND: Are there any other general features I should be aware of? YOU: Municipal bonds tend to have a relatively return than other types, in part due to the fact that unlike other bonds, the interest income is federal income taxes. The return also depends on whether the bonds are callable, meaning that the issuer can retire the bond (by paying you back and ceasing to pay interest payments) at any point before the maturity date. FRIEND: So if the interest rate were to fall and the issuer were able to retire my bond, I would be holding the bond, because if I reinvest the money the issuer returns to me, I would receive a off than if I were to continue interest rate. YOU: Exactly. In such a case, the issuer would pay you a loss. but this generally would not fully compensate you for your FRIEND: Got it. Thanks for your help

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