Putable Bonds

A put option gives the bondholder the right to sell the bond back to the issuing company at a prespecified price, typically par. Bondholders are likely to exercise such a put option when the fair value of the bond is less than the put price because interest rates have risen or the credit quality of the issuer has fallen. Exercise styles used are similar to those we enumerated for callable bonds.

Unlike a call option, a put option has value to the bondholder because the choice of whether to exercise the option is the bondholder’s. For this reason, a putable bond will sell at a higher price (offer a lower yield) compared to an otherwise identical option-free bond.