putable bond
A bond that gives the holder the right to demand early repayment from the issuer at predetermined dates and prices, protecting investors if rates rise.
Example
“The putable bond allowed her to demand repayment if rates rose significantly — valuable protection against rising rates.”
Memory Tip
PUTABLE bond = investor can FORCE early repayment. The opposite of callable. Protects investors.
Why It Matters
Putable bonds matter because they give individual investors a safety net against rising interest rates. If you own a putable bond and rates climb significantly, you can force the issuer to buy back your bond at a set price, allowing you to reinvest the proceeds at higher yields instead of being locked into lower returns.
Common Misconception
Many people mistakenly believe that putable bonds are risk-free investments because of the early repayment option. In reality, the issuer could still default before the put date, and the bond value can fluctuate based on credit quality and market conditions, so the put option only protects you in specific interest rate scenarios.
In Practice
Suppose you buy a putable bond issued at par value of 1000 dollars with a 3 percent coupon and a put option in two years at par. If interest rates rise to 6 percent within 18 months, you can exercise your put right and have the issuer repay your 1000 dollars, then reinvest that money in new bonds yielding 6 percent instead of being stuck with the 3 percent coupon.
Etymology
PUTABLE (can be put back to the issuer) BOND. A BOND that investors can PUT (return) to the issuer.
Common Misspellings
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