Premium Put Convertible

DEFINITION of 'Premium Put Convertible'

A convertible bond with an additional put feature that allows it to be redeemed at a premium sometime during its life. As with a put option, the issuer of the premium put convertible bond has an obligation to buy back the bond upon the discretion of the bondholder. Thus, the put option attached to this convertible bond allows it to be redeemed at a premium by the bondholder anytime before maturity.

BREAKING DOWN 'Premium Put Convertible'

The price of a regular convertible bond is highly dependent on the price of the underlying stock; as the stock price rises, the price of the convertible increases and as the stock price falls, the price of the convertible decreases. This relationship between the premium put convertible and the underlying stock may hold when the stock is rising, but it may be less apparent when the stock is falling, since the put provision provides a degree of downside protection for the premium put convertible.


In exchange for the right to "put" the premium put convertible to the issuer, the bondholder may have to settle for lower coupon payments from the bond. A premium put convertible will, therefore, generally have a lower coupon rate than a regular convertible bond.

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RELATED FAQS
  1. How do I use a premium put convertible?

    Holders of convertible bonds face all the pitfalls that traditional bondholders face - liquidity risk, interest rate risk ... Read Answer >>
  2. Where does the stock come from when convertible bonds are converted to stock?

    First, let's define convertible bonds. A unique combination of debt and equity, they provide investors with the chance to ... Read Answer >>
  3. What is a convertible bond?

    A convertible bond is a bond issued by a corporation that, unlike a regular bond, gives the bondholder the option to trade ... Read Answer >>
  4. How is convertible bond valuation different than traditional bond valuation?

    Read about bond valuation, particularly the differences between how a traditional bond is valued and how a convertible bond ... Read Answer >>
  5. What does it mean when an investor moves a bond to equity?

  6. Why do some investors prefer convertible over “straight” bonds?

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