Putable Bond
IntermediateA putable bond is a bond that gives the investor the right to sell it back to the issuer at a set price, usually its face value, on specified dates before maturity.
A putable bond is the opposite of a callable bond. The put option belongs to the investor, protecting them if interest rates rise or the issuer’s credit weakens.
If interest rates rise, the price of an ordinary bond falls. With a putable bond, the investor can sell the bond back to the issuer at the agreed price and reinvest at the new, higher rates.
For example, an investor holds a ten-year bond paying 4%, putable at 100 after five years. If rates have risen to 6% by then, the investor can return the bond for 100 and buy a new bond paying 6%.
Because the put option is valuable to investors, putable bonds usually pay lower interest rates than comparable bonds without the feature. They are less common than callable bonds. Their prices tend to fall less than ordinary bonds when rates rise, since the put sets a floor on their value.
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