May 25, 2005
Joel Spolsky writes that people should be careful buying bonds with prepayment options:
Most bonds sold to investors at retail by full service brokers are disguised to look like they pay a lot of interest when the truth is that the high interest rates never really compensate you for the option you're implicitly selling.
This is not a coincidence. It's by design. All else being equal, the people who sell these bonds love to sneak in prepayment options because it enables them to make it look like you're getting a higher rate of return.