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Puttable bond or put bond is a combination of straight bond and embedded put option.[1] The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal. The put option is usually exercisable on specified dates.

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 higher rate. Bondholders are ready to pay for such protection by accepting a lower yield relative to a straight bond.

Of course, if a company (or other entity) has a severe liquidity crisis, it may be incapable of paying for the bonds when the investors wish. The investors also can't sell back the bond at any time, rather specified dates. However they would still be ahead (in time) of holders of non-puttable bonds, who may have no more right than 'timely payment of interest and principal' (which could perhaps be many decades, to get all their money back).

The price behaviour of puttable bonds is the opposite of that of a callable bond. Since call option and put option are not mutually exclusive, a bond may have both options embedded.

Pricing

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.

References

External links

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