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 $25,000 such that it will provide current income and increase the diversification of his assets. He has heard a lot about mortgage 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 mortgage bonds. FRIEND: Can you explain to me the basics of how investing in a mortgage bond will increase my current income? YoU: Under a standard bond agreement, If you were to purchase a 15 -year, $25,000 mortgage bond with a 10% coupon, you would receive in interest each year, and at the end of the 15-year period, you would receive the por value of FRIEND: OK, and am I guaranteed to receive these interest payments and the par value? FRIEND: Are there any other general features I should be aware of? FRIEND: OK, and am I guaranteed to recelve these interest payments and the par value? YoU: Bonds generally have associated risk than stocks do, but different types of bonds are associated with different levels of security. Mortgage bonds have standing, meaning that they backed by a legal claim on some specific property. FRIEND: Are there any other general features 1 should be aware of? You: Mortgage bonds are a type of issued by political subdivisions of the U.S. government, but are not actually obligations of the U.S. Treasury. Another common feature of mortgage bonds is that they , 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: Why would an issuer want to retire a bond early? YoU: Suppose that 6 months after you purchase the bond, the market rate for interest on this type of bond falls to 8.00%. This will cause the to . From the issuer's perspective, the lower interest rate means that he or she would be new bonds at this lower rate than continuing to pay you 10%. off issuing FRIEND: Got it. Thanks for your help