Putable bonds

Definition

Putable bonds are a type of bond that allows the holder to force the issuer to repurchase the bond before its maturity date at specified times. These bonds provide investors with more flexibility and reduced interest rate risk.

5 Must Know Facts For Your Next Test

1. Putable bonds typically have lower yields compared to non-putable bonds due to the added flexibility they provide to investors.
2. Investors might exercise the put option if interest rates increase, allowing them to reinvest at higher prevailing rates.
3. The price of putable bonds is generally higher than that of comparable non-putable bonds because of the embedded put option.
4. Issuers may include put options in bonds to make them more attractive to conservative investors who want protection against rising interest rates.
5. Putable bonds can be an effective tool for managing long-term liabilities by providing a safeguard against unfavorable market conditions.

Review Questions

Related terms

Callable Bonds:

Bonds that allow the issuer to repay the bond before its maturity date at specified times.

Convertible Bonds: Bonds that can be converted into a predetermined number of shares of the issuing company’s stock.

Bond Yield: The return an investor realizes on a bond, often expressed as an annual percentage.