Puttable bond (put bond, putable or retractable bond) is a
bond
Bond or bonds may refer to:
Common meanings
* Bond (finance), a type of debt security
* Bail bond, a commercial third-party guarantor of surety bonds in the United States
* Chemical bond, the attraction of atoms, ions or molecules to form chemica ...
with an
embedded put option. The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the
principal. The
put option is exercisable on one or more specified dates.
Overview
This type of bond protects investors: if interest rates rise after bond purchase, the future value of coupon payments will become less valuable. Therefore, investors sell bonds back to the issuer and may lend proceeds elsewhere at a higher rate. Bondholders are ready to pay for such protection by accepting a lower
yield relative to that of a straight bond.
Of course, if an issuer has a severe
liquidity crisis In financial economics, a liquidity crisis is an acute shortage of ''liquidity''. Liquidity may refer to market liquidity (the ease with which an asset can be converted into a liquid medium, e.g. cash), funding liquidity (the ease with which borrow ...
, it may be incapable of paying for the bonds when the investors wish. The investors also cannot sell back the bond at ''any'' time, but at specified dates. However, they would still be ahead of holders of non-puttable bonds, who may have no more right than 'timely payment of interest and principal' (which could perhaps be many years to get all their money back).
The price behaviour of puttable bonds is the opposite of that of a
callable bond
A callable bond (also called redeemable bond) is a type of bond (debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. In other words, on the call ...
. Since
call option and
put option are not
mutually exclusive
In logic and probability theory, two events (or propositions) are mutually exclusive or disjoint if they cannot both occur at the same time. A clear example is the set of outcomes of a single coin toss, which can result in either heads or tails ...
, a bond may have both options embedded.
Pricing
:''See also
Bond option: Embedded options, for further detail.''
Price of puttable bond = Price of straight bond + Price of put option
* Price of a puttable bond is always higher than the price of a straight bond because the put option adds value to an investor;
* Yield on a puttable bond is lower than the yield on a straight bond.
Putable Bonds
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References
External links
David Wang, ''Journal of Academy of Business and Economics, International Academy of Business and Economics'', 2004
Resolution Financial Software
Bonds with Embedded Options and Options on Bonds
{{Bond market, state=collapsed
Bonds (finance)
Options (finance)
Embedded options