Putable Bonds

Putable bonds, also referred to as put bonds or multi-maturity bonds, offer exceptional flexibility for investors since they incorporate the right of the holder to sell these bonds back to the seller before the putable bond reaches full maturity. The bond indenture lists the dates when the putable bond can be resold to the issuer and the price applicable to that sale, usually the par value of the bond. Typically, bonds issued by corporate institutions and municipalities incorporate one to five-year put provisions. Essentially, putable bonds can be regarded as a combination of a traditional put option with a bond issue; the combination provides additional incentives for buyers, since a putable bond limits the risk while guaranteeing a basic level of return.

Putable bond convexity


Putable bond convexity is always positive and, in fact, provides the greatest positive convexity of all bonds. Convexity refers to the sensitivity bond prices demonstrate when interest rates fluctuate. Negative convexity indicates a large degree of sensitivity, while positive convexity is more desirable since bonds with higher positive convexity maintain their sales price more consistently even with major interest rate fluctuations. Putable bonds are generally less volatile than other types of bond investments, making them a desirable choice for investors who want the security of an assured return on investment. Because putable bonds offer buyers the chance to resell their bonds at a specific price at intervals before the bond reaches maturity, they offer investors the chance to take advantage of opportunities that may pay higher interest rates or present greater short-term rewards. This flexibility and lower volatility usually ensure that putable bonds sell for higher prices than other comparable bond issues.

Putable bond structures


Depending on the terms set out in the debenture, putable bonds may allow buyers to force a sellback only once or multiple times during the putable bond’s normal maturity period. Putable bonds that incorporate a single sellback opportunity are referred to as one-time put bonds, while those that allow these sellback opportunities more frequently are known as multiple put bonds. Multiple put bonds offer more flexibility for investors and usually attract a higher sales price than one-time put bonds, but require a larger initial investment as well.
Tim Ord
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