This tip really works when you are dealing with a prospect that owns bonds. Almost all bonds issued in today’s market have a callable characterize to them. This method that if the bond issuer can offer the same bonds at a lower interest rate than they are currently paying, they will “call” the bonds and reissue.
The risk to the bond buyer is two-fold:
1. The bond owner will receive the funds from their investment being called and be forced to look at lower interest options because interest rates are lower
2. If the bond is not called then that would average that interest rates in general are higher. The owner is then “stuck” with the bond they own and it is paying less than the prevailing general interest rates.
When I meet someone who owns bonds with a callable characterize I always say this:
“Mrs. Jones, it appears that you bought a bond with a back door escape hatch. This method the bond company can change the rules if it is in their best interest.”
I then go one to explain what happens and how she will always be at a disadvantage. Here is a little more about callable bonds.
Callable: unprotected to payment of the principal amount (and accrued interest) prior to the stated maturity date, with or without payment of a call premium. Bonds can be callable under a number of different circumstances, including at the option of the issuer, or on a mandatory or extraordinary basis.
Use the “back door escape hatch” line to help your prospect understand more about their bond holdings