The big picture about bonds

A FRIEND, upset at how his mother was sold a financial product, recently told me this story.

His mum was convinced by her banker to buy a complex product which involved the bonds of four foreign companies with coupons ranging from 3 to 5 per cent.

Now, 3 to 5 per cent sounds good. But if she knew how bonds worked, she would have asked what the yield of the bonds were.

In this case, her banker did not mention yields at all. Worse still, the product sold was just a derivative on the underlying bonds. The buyer has no legal ownership of the underlying bonds.

My friend cancelled the deal immediately upon finding out. It was unclear what kinds of gains could have come out of it. But it was clear that the bank would make a spread from selling suc…