What is a Puttable Bond?

A puttable bond is a fixed-income security that contains a put option. The put option means that the bondholder has the right to sell the bond back to the issuer before it matures at a fixed price. This allows the investors to put the bond back when the interest rates rise or when they want to reduce the risk. This feature of puttable bonds provides an additional layer of protection, as investors can easily exit the investment early instead of holding the bond until it matures. This article explains puttable bonds meaning, how they function, their types, and more. 

How Does a Puttable Bond Works?

Below is a step-by-step guide on how puttable bond works.  

• Issuance: An issuer first releases a bond that includes a put option. This bond has all the basic features like maturity, coupon rate, and face value, but it also provides the investor with the right to return the bond before maturity. 
• Coupon Payments: Throughout the bond’s tenure, the issuer is responsible for making interest payments at specific intervals. 
• Put Option Use: If the market interest rates are rising or if there are more attractive investments, then the investor may choose to activate the put option to exit early. 
• Redemption: When the option has been exercised, the issuer needs to repurchase the bond at the agreed redemption price.  
• Reinvestment: Once the investor gets the proceeds, they may divert them to investments with better returns in the prevailing market conditions. 

Types of Puttable Bonds 

There are three main types of puttable bonds.  

1. Multi-Maturity Bonds: The multi-maturity bonds give the investors several set dates within which they may give back the bond to the issuer. To take an example, a 10-year bond can have put options after the 3rd, 5th, or 7th year.   
2. Tender Bonds: These bonds are commonly linked to municipal or tax-exempt instruments. They allow investors to request early repayment. Tender bonds are typically floating-rate and often used in public or infrastructure financing. 
3. Variable Rate Demand Obligations (VRDOs): These long-term bonds help investors demand repayment at any time, while the interest rate resets frequently to reflect current market conditions. 

Advantages and Disadvantages of Puttable Bonds 

The following are the advantages and disadvantages of puttable bonds.  

Conclusion 

Puttable bonds provide investors with both flexibility and risk control by allowing early exit when interest rates rise, or market conditions turn unfavourable. These bonds can be useful for conservative investors who value predictable returns along with the ability to redeem their investment when needed. While these funds provide strong protection, they also come with lower yields and fixed put dates. Investors can compare different bond structures and evaluate their suitability based on financial goals and risk. Those exploring bonds and other market-linked instruments can easily review and invest through an online trading app, making the overall investment process more convenient.