Put Bond

Put bond

A bond that the holder may choose either to exchange for par value at some date or to extend for a given number of years. If the price is above par, the put is a "premium put."

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Variable-Rate Demand Note

A debt security that a holder may require the issuer to redeem before maturity. When this occurs, the issuer must pay par to the holder, and the holder loses any future coupon payments that he/she might otherwise have been due. An advantage to a variable-rate demand note from the holder's standpoint is the fact that the holder may reinvest the par value in a new bond in a time of rising interest rates. This protects the holder from certain types of interest rate risk.

Variable-rate demand notes come in two main forms. The first allows the holder to demand redemption on any of several days throughout the life of the bond, while the second only allows this on one particular day. Variable rate demand notes are also known as variable rate demand obligations, option tender bonds, or put bonds. In Canada, the most common term is a retractable bond.

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put bond

A relatively unusual bond that allows the holder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price, usually at par value, is set at the time of issue. A put bond allows the investor to redeem a long-term bond before maturity, but the yield generally equals the one on short-term rather than long-term securities. Also called multimaturity bond, option tender bond. See also mandatory tender bond, poison-put bond, premium put, yield to put.

Case Study A put option on a bond benefits bondholders who are able to force the issuer to redeem its bonds prior to the scheduled maturity. Forced redemptions typically occur following a period of rising interest rates, when bondholders can reinvest their funds at a return higher than the return paid by the bond. Bondholders may also choose an early redemption in the event the issuer runs into serious financial difficulties and bondholders become concerned about whether the issuer will be around on the scheduled maturity date for the bonds. A large issue of put bonds can place the issuer at substantial risk in the event funds are unavailable to pay for a forced redemption. This was the case with Polish conglomerate Elektrim in late 2001 when nearly all of its bondholders decided to exercise a mid-December put on 440 million worth of convertible bonds. Redemption would occur at a premium to par and entail accrued interest requiring the power and telecom company to come up with 488 million. At the time Elektrim said it had 276 million in cash, substantially less than the amount required to pay its bondholders. Likelihood of the redemption caused the firm to search for short-term financing and consider emergency asset sales in order to raise additional funds. Put bonds are uncommon and are generally issued to gain a lower interest cost for the borrower. The risk of put bonds is substantial for the borrower in the event proceeds are invested in long-term assets and the issuer has limited liquidity to redeem the bonds on short notice.