Puttable bond

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Puttable bond put bond, putable or retractable bond is a bond with an embedded put option. The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal. The put option is exercisable on one or more specified dates. This type of bond protects investors: Therefore, investors sell bonds back to the issuer and may lend proceeds elsewhere at a higher rate.

Bondholders are ready to pay for such protection by accepting a lower yield relative to that of a straight bond. Of course, if an issuer has a severe liquidity crisisit may be incapable of paying for the bonds when the investors wish. The investors also cannot sell back the bond at any time, but at specified dates.

However, they would still be ahead of holders of non-puttable bonds, who may have no more right than 'timely payment of interest and principal' which could perhaps be many years to call and put option in debt market all their money back. The price behaviour of puttable bonds is the opposite of that of a callable bond.

Since call option and put option are not mutually exclusivea bond may have both options embedded. From Wikipedia, the free encyclopedia. Accessed September 27, Sean Cleary and Charles P. Jones, Investment AlternativesInvestments: Bond Debenture Fixed income. Accrual bond Auction rate security Call and put option in debt market bond Commercial paper Contingent convertible bond Convertible bond Exchangeable bond Extendible bond Fixed rate bond Floating rate note High-yield debt Inflation-indexed bond Inverse floating rate note Perpetual bond Puttable bond Reverse convertible securities Zero-coupon bond.

Asset-backed security Collateralized debt obligation Collateralized mortgage obligation Commercial mortgage-backed security Mortgage-backed security. Call and put option in debt market from " https: Bonds finance Options finance. Views Read Edit View history. This page was last edited on 14 Septemberat By using this site, you agree to the Terms of Use and Privacy Policy.

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In finance , a bond option is an option to buy or sell a bond at a certain price on or before the option expiry date. Generally, one buys a call option on the bond if one believes that interest rates will fall, causing an increase in bond prices.

Likewise, one buys the put option if one believes that the opposite will be the case. Bonds , the underlyers in this case, exhibit what is known as pull-to-par: On the other hand, the Black—Scholes model, which assumes constant volatility, does not reflect this process , and cannot therefore be applied here; [1] see Black—Scholes model Valuing bond options.

Addressing this, bond options are usually valued using the Black model or with a lattice-based short rate model such as Black-Derman-Toy , Ho-Lee or Hull—White. For American- and Bermudan- styled options , where exercise is permitted prior to maturity, only the lattice-based approach is applicable. The term "bond option" is also used for option-like features of some bonds " embedded options ". These are an inherent part of the bond, rather than a separately traded product.

These options are not mutually exclusive, so a bond may have several options embedded. Here, the bond is priced as a "straight bond" i. The option value is then added to the straight bond price if the optionality rests with the buyer of the bond; it is subtracted if the seller of the bond i.

European Put options on zero coupon bonds can be seen to be equivalent to suitable caplets, i. See for example Brigo and Mercurio , who also discuss bond options valuation with different models. From Wikipedia, the free encyclopedia. Bank A Underlying asset: Bank A pays a premium to Bank B which is the premium percentage multiplied by the face value of the bonds.

At the maturity of the option, Bank A either exercises the option and buys the bonds from Bank B at the predetermined strike price, or chooses not to exercise the option. In either case, Bank A has lost the premium to Bank B. A European bond option is an option to buy or sell a bond at a certain date in future for a predetermined price. An American bond option is an option to buy or sell a bond on or before a certain date in future for a predetermined price.

Bond Debenture Fixed income. Accrual bond Auction rate security Callable bond Commercial paper Contingent convertible bond Convertible bond Exchangeable bond Extendible bond Fixed rate bond Floating rate note High-yield debt Inflation-indexed bond Inverse floating rate note Perpetual bond Puttable bond Reverse convertible securities Zero-coupon bond.

Asset-backed security Collateralized debt obligation Collateralized mortgage obligation Commercial mortgage-backed security Mortgage-backed security. Energy derivative Freight derivative Inflation derivative Property derivative Weather derivative. Retrieved from " https: Bonds finance Options finance.

All articles with dead external links Articles with dead external links from November Articles with permanently dead external links. Views Read Edit View history. Languages Deutsch Edit links. This page was last edited on 23 July , at By using this site, you agree to the Terms of Use and Privacy Policy.