Callable & Puttable Bonds

Key Ideas:

  • Callable and puttable bonds are both types of bonds that give the bond issuer or bondholder the right to take specific actions with respect to the bond before maturity.
  • Callable bonds give the issuer the right to pay the principal before the maturity date
  • Puttable bonds give the bondholder the right to sell the bond back before the maturity date

The Nitty Gritty

Callable bonds are bonds that can be redeemed by the issuer before their maturity date. This means that the issuer can buy back the bond from the bondholder before the bond's maturity date. Callable bonds typically offer higher yields to compensate for the risk that the bond may be called before its maturity date. However, its not like the issuer can just call the bond whenever. The contract usually stipulates a lock-out period for the first few years to prevent the issuer from exercising the call option immediately.

On the other hand, puttable bonds give the bondholder the option to sell the bond back to the issuer before its maturity date. This means that the bondholder has the right to put, or sell, the bond back to the issuer at a specified price before the bond's maturity date. Puttable bonds are often considered less risky than non-puttable bonds because the bondholder has an additional option to sell the bond back to the issuer if market conditions change.

In summary, callable bonds give the issuer the option to call, or redeem, the bond before its maturity date, while puttable bonds give the bondholder the option to put, or sell, the bond back to the issuer before its maturity date. Because of the nature of each, callable and puttable bonds usually move in the opposite direction.