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

    Conventional convertible bonds give the bondholder the right to exchange the bond for a certain amount of the issuer's common ... Read Answer >>
  4. Why would a corporation issue convertible bonds?

    Discover how corporations issue convertible bonds to take advantage of much lower interest rates as a result of a conversion ... Read Answer >>
  5. 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 >>
  6. All of the following statements about convertible bonds are FALSE EXCEPT:

    A. If all of the bonds are converted, the stockholders will benefit.B. They depreciate when the stock rises in value.C. They ... Read Answer >>
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