put bond

Put Bond

A bond that allows the holder to force the issuer to repurchase the security at specified dates before maturity. The repurchase price is set at the time of issue, and is usually par value.

Notes:

Bondholders have the option of putting bonds back to the issuer either once during the lifetime of the bond (known as a one-time put bond), or on a number of different dates. Of course, the special advantages of put bonds mean that some yield must be sacrificed.

This type of bond is also known as a multimaturity bond, an option tender bond, a variable rate demand obligation (VRDO).

See also: Bond, Callable Bond, Convertible Bond, Coupon Bond, Discount Bond, Eurobond, Maturity Date, Par Value, Premium 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."

---

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.