The repurchase price is set at the time of issue and is usually at Putttable value. A put bond can also be called a puttable bond or a retraction bond. When the bond matures, the investors or lenders receive their principal investment valued at par. It is cost effective for bond issuers to issue bonds with lower yields as this reduces their cost of borrowing.
However, to encourage investors optioh accept a lower yield on a bond, an issuer might embed options that are advantageous to bond investors. One ride of bond that is favorable to investors is the put, or puttable, bond. A put bond is a bond with an embedded put optiongiving bondholders the right, but not the obligation, to demand early repayment of the principal from the issuer or a third party acting as an agent for the issuer. The put option on the bond can be exercised upon the occurrence of specified events or conditions or at a certain time or times prior to maturity. In effect, bondholders have the option of "putting" bonds back to the issuer either once during the lifetime of the bond known as a one-time put bondor on a number of different dates.
Bondholders can exercise their options if interest rate levels in the markets increase.
Call Toll Free
Puttable Bond Duration Puttable bond is a great combination of put option and bond which gives great flexibility to Puttanle holder of the bond. Ridet the bond indenture, the duration, conditions for selling the bond, different dates for putting down the bond and other terms and conditions are mentioned. Most of the puttable bonds have a duration ranging from 1 to 5 years. In this case, the duration of the bond is the effective duration as well.
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Then he can buy another bond at a higher yield with the same money. In this situation, the effective duration is shorter Purtable the duration or maturity of the bond. It has a life of 20 years. Now the bondholder can exercise his right and sell back the bond to the issuer. The issuer has to redeem the money according to the repurchase price determined at the time of issue of the bond. Advantages of Puttable Bonds For Bondholders The puttable bonds can reduce the reinvestment risks of the investors.
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This is because when the interest rate in the market rises, the bondholder can sell the puttable optlon which is trading Puttable a lower coupon rate and invest the same money in buying other bonds which are trading at higher interest rates. Another benefit to the bondholder is that the price of the puttable bond cannot fall below the put price. It is because a rational investor will sell the bond to the issuer when the interest rate in the market starts rising over the coupon rate of the bond. For Issuing Company For the company, these bonds provide a great source of debt financing.
The company can pay lower interest to the bondholder but deploy the dider for various business operations. Convexity of Puttable Bond Puttable bonds always have a positive convexity. It is because the duration of the bond falls when the yield in the market increases and vice versa.