Puttable Bond

Puttable bonds give bondholders the right, but not obligation, to sell bonds back to the issuer at par value before maturity on specified dates. This put option protects investors against rising interest rates and credit deterioration. For example, if you own a 10-year puttable bond and rates rise significantly after 5 years, you can put the bond back to the issuer at par and reinvest at higher rates. Put provisions might allow exercise annually, at specific dates, or upon certain events (like credit downgrade). Puttable bonds trade at higher prices (lower yields) than standard bonds because the put option has value – investors typically accept 20-40 basis points less yield for put protection. They exhibit positive convexity throughout their range. While less common than callable bonds, puttable bonds are popular during volatile periods. Some bonds have both call and put features. The put option’s value increases with interest rate volatility.