Put Bond

Posted in Finance, Accounting and Economics Terms, Total Reads: 780

Definition: Put Bond

A bond that sanctions the investor (bond buyer) to force the issuer to repurchase the bond at stated dates before maturity. The put options means that the bond holder has the right to sell the bond back to the issuer on a particular date or on a set of different dates before maturity. The option provides a special advantage to the bond holders so they have to forgo some yield.

If the bond holder feels that the prospects of issuer have weakened and the issuer may not be able to pay off the bond principle, he can force the issuer to repurchase the bond and return the principle amount. A bond holder can exercise his option to sell the bond back to the investor if interest rates have risen because in that case he has better prospects of returns by investing the principle elsewhere.

The put option gives the investors a safe exit option with limiting the losses. This reduces the price risk by adding extra security. Due to this provision, the bonds will be sold at a higher price compared to other similar bonds without the option. The opposite of put is a call option where the issuer can call back the bonds by paying off the investors.

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