Question

Compare the yield and price of a putable bond and a straight bond with the same characteristics. Briefly explain your answer.

Answer 1

Answer

Introduction of yield and price of a putable bond and a straight bond

Bond:-

Bonds are long-term debt or funded debt, issued by corporations, and governments and their agencies to finance operations or special projects. Corporations pay interest and principal from earnings, whereas governments pay from taxes, or revenues from special

Characterstics

Characteristics of a Bond

• A bond is generally a form of debt which the investors pay to the issuers for a defined time frame. ...
• Bonds generally have a fixed maturity date.
• All bonds repay the principal amount after the maturity date; however some bonds do pay the interest along with the principal to the bond holders.

Bond Yield:-

Bond yield is the return an investor realizes on a bond. The bond yield can be defined in different ways. ... The current yield is a function of the bond's price and its coupon or interest payment, which will be more accurate than the coupon yield if the price of the bond is different than its face value.

Price of a Putable bonds

A putable bond (put bond or retractable bond) is a type of bond that provides the holder of a bond (investor) the right, but not the obligation, to force the issuer to redeem the bond before its maturity date. In other words, it is a bond with an embedded put option. Puttable bonds are directly opposite to callable bonds.

Straight bond

A straight bond is a bond that pays interest at regular intervals, and at maturity pays back the principal that was originally invested. A straight bond has no special features compared to other bonds with embedded options

A straight bond is the most basic of debt investments. It is also known as a plain vanilla bond because it has no additional features that other types of bonds might have. All other bond types are variations of or additions to standard straight bond features. For example, some bonds can be converted into shares of common stock and others can be called or redeemed before their maturity dates. Special bonds such as convertible, callable, and puttable bonds are structured as straight bonds plus a call option or warrant.

Same characteristics of the Yield and price of a Putable bond and a Straight bond

Price of A Putable Bond Characterstics

• A put bond is a debt instrument with an embedded option that gives bondholders the right to demand early repayment of the principal from the issuer.
• The embedded put option acts an incentive for investors to buy a bond that has a lower return.
• The put option on the bond can be exercised upon the occurrence of specified events or conditions or at a certain time or times.

Stright Bond Characterstics

• Straight bonds are debt instruments used by fixed income investors to lend money (creating debt) to an entity.
• The entity, which can be a government, municipality, or an organization, promises to pay the interest on the debt and, at maturity, pay back the original loan.
• A straight bond include constant coupon payments, face value or par value, purchase value, and a fixed maturity date. A straight bondholder expects to receive periodic interest payments, known as coupons, on the bond until the bond matures
• At maturity date, the principal investment is repaid to the investor. The return on principal depends on the price that the bond was purchased for. If the bond was purchased at par, the bondholder receives the par value at maturity.
• If the bond was purchased at a premium to par, the investor will receive a par amount less than his or her initial capital investment. Finally, a bond acquired at a discount to par means that the investor’s repayment at maturity will be higher than his or her initial investment.

Conclusion

Above are the Characterstics of  yield and price of a putable bond and a straight bond