A bond that allows bondholders to redeem before maturity at a high price should certain, named events take place. These events commonly include restructuring, a leveraged buyout, an attempted hostile takeover, or paying dividends in excess of a certain amount or percentage. Poison-put bonds can act as an anti-takeover measure; they help management discourage takeovers by raising their expense. On the other hand, when the company is going through a difficult time, poison-put bonds can limit management's restructuring options for the same reason.
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A bond that allows an investor to cash in a security before maturity if the issuer becomes the target of a takeover hostile to its management. Poison-put bonds make it expensive for the bidder to buy the target firm because the bidder will have to raise cash to pay off the owners of the bonds. The bonds can benefit the bondholders because they permit the holders to cash in the securities if the takeover spawns a new, more leveraged high-risk corporate entity. See also poison pill.
Wall Street Words: An A to Z Guide to Investment Terms for Today's Investor by David L. Scott. Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved. All rights reserved.