A:

A put option on a bond is a provision that allows the holder of the bond the right to force the issuer to pay back the principal on the bond. A put option gives the bond holder the ability to receive the principal of the bond whenever they want before maturity for whatever reason. If the bond holder feels that the prospects of the company are weakening, which could lower its ability to pay off its debts, they can simply force the issuerer to repurchase their bond through the put provision. It also could be a situation in which interest rates have risen since the bond was intially purchased, and the bond holder feels that they can get a better return now in other investments.

Another benefit to a bond with this provision is that it removes the pricing risk bond holders face when they attempt to sell the bond into the secondary market, where they may have to sell at a discount. The provision adds an extra layer of security for bond holders - as it gives them a safe exit strategy. Because this option is favorable for bond holders, it will be sold at a premium to a comparable bond without the put provision.

Bonds with a put option are referred to as put bonds or putable bonds. This is the opposite of a call option provision which allows the issuer to redeem all of the outstanding bonds. The exact terms and details of the provision is discussed in the bond indenture.

RELATED FAQS
  1. What determines the price of a bond in the open market?

    Learn more about some of the factors that influence the valuation of bonds on the open market, and why bond prices and yields ... Read Answer >>
  2. Which factors most influence fixed income securities?

    Learn about the main factors that impact the price of fixed income securities, and understand the various types of risk associated ... Read Answer >>
  3. A corporate bond I own has just been called by the issuer. How can a company legally ...

    Bond issues can contain what is referred to as a call provision, which is a right afforded to the issuing company enabling ... Read Answer >>
  4. Why is my bond worth less than face value?

    Find out how bonds can be issued or traded for less than their listed face values, and learn what causes bond prices to fluctuate ... Read Answer >>
  5. What are the risks of investing in a bond?

    The most well-known risk in the bond market is interest rate risk - the risk that bond prices will fall as interest rates ... Read Answer >>
  6. What happens to the price of a premium bond as it approaches maturity?

    Learn how bonds trade in regard to premiums and discounts, and how bond prices shift closer to par value as bonds approach ... Read Answer >>
Related Articles
  1. Home & Auto

    How To Choose The Right Bond For You

    Bond investing is a stable and low-risk way to diversify a portfolio. However, knowing which types of bonds are right for you is not always easy.
  2. Bonds & Fixed Income

    How To Evaluate Bond Performance

    Learn about how investors should evaluate bond performance. See how the maturity of a bond can impact its exposure to interest rate risk.
  3. Professionals

    Types Of Bonds

    We look at the many types of bonds and explain what differentiates them from each other.
  4. Retirement

    Bond Basics: Conclusion

    Now you know the basics of bonds. Not too complicated, is it? Here is a recap of what we discussed: Bonds are just like IOUs. Buying a bond means you are lending out your money. Bonds are ...
  5. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Bonds

    What they are: Debt securities in which you lend money to an issuer (such as a corporation or government) in exchange for interest payments and the future repayment of the bond’s face value. ...
  6. Options & Futures

    Top 6 Uses For Bonds

    We break down the stodgy stereotype to see what these investments can do for you.
  7. Bonds & Fixed Income

    Why Bad Bonds Get Good Ratings

    Credit ratings are not the only tool to rely on when assessing bonds. Find out why they sometimes fall short.
  8. Bonds & Fixed Income

    Advanced Bond Concepts: Bond Type Specifics

    Before getting to the all-important subject of bond pricing, we must first understand the many different characteristics bonds can have. When it comes down to it, a bond is simply a contract ...
  9. Bonds & Fixed Income

    5 Fixed Income Plays After the Fed Rate Increase

    Learn about various ways that you can adjust a fixed income investment portfolio to mitigate the potential negative effect of rising interest rates.
  10. Bonds & Fixed Income

    Find The Right Bond At The Right Time

    Find out which bonds you should be investing in and when you should be buying them.
RELATED TERMS
  1. Extendable Bond

    A long-term debt security that includes an option to lengthen ...
  2. Bond

    A debt investment in which an investor loans money to an entity ...
  3. Bond Option

    An option contract in which the underlying asset is a bond. Other ...
  4. Bond Resolution

    1. A document used with government bonds, especially general ...
  5. Put Bond

    A bond that allows the holder to force the issuer to repurchase ...
  6. Call Provision

    A provision on a bond or other fixed-income instrument that allows ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center