Puttable bond

Puttable bond

Puttable bond or put bond is a combination of straight bond and embedded put option. [ [http://www.financial-guide.net/markets-bonds-bond_types-page7.html Bonds: Bond Types] ] 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.

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.

References

External links

* [http://findarticles.com/p/articles/mi_m0OGT/is_1_3/ai_n8690369 A model to price puttable corporate bonds with default risk]
* [http://www.imf.org/external/pubs/ft/wp/2003/wp03201.pdf Puttable and Extendible Bonds: Developing Interest Rate Derivatives Emerging Markets]
* [http://www.derivativepricing.com/helpfiles/2332.htm Introduction to Pricing Approach]


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