Question

Describe, in at least 250 words, what bond it means for a bond to be Callable or Puttable. Why would someone call or put a bond?

Answer 1

Callable bonds meaning:

It is long term fixed rate Bond where the issuer enjoys a call option that is right to buy back the bonds from the investors prior to maturity at a predetermined price known as call price. the call price is usually at a premium to face value.

The issuer will obviously call the bonds (that is refund prior to maturity) if the interest rate falls, such that issuer can refund the old bonds and issue new bonds at a lower interest rate.

When interest rate falls, the bond are price is retired at their predetermined value.

Hence when interest rate falls, the bond are the price of the callable bond will rise less. (Rise at a lower rate).

Puttable bonds:

This is a fixed rate bond with an embedded put option i.e right to sell enjoyed by an investor.

Thus a 20 years bond may be Puttable in 5 years.

Investors can exercise the put option, if the interest rate rises.

Such that he can get his money back & Invest elsewhere at a higher rate.

Also, the yield/interest payment on Puttable bond is also less compared to plain vanilla bonds or callable bonds.

Because,

Here INVESTORS ENJOY THE RIGHT.