Putable bond
A bond the holder may sell back at a set price. They will when rates rise, so it holds its value up and pays a lower yield.
Where you will meet it
Putable bond appears in 12 learning outcomes on the CFA syllabus. A few of them:
- Contrast the Z-spread with the option-adjusted spread
“For a callable bond the option benefits the issuer, so the option-adjusted spread is below the Z-spread; for a putable bond it is above.”
- Explain bonds and other debt securities that contain embedded options
“An extendible bond, which the holder may extend at the same coupon, is equivalent to a longer putable bond.”
- Explain how a callable or putable bond's value links to the value of its embedded option and of the equivalent straight bond
“For a putable bond the holder owns the put, so in value terms putable = straight + put, and put = putable − straight.”
- Explain how to apply the arbitrage-free approach when valuing a bond that contains embedded options
“For a putable bond, it is V = the higher of the computed value and the put price, because the holder puts when the bond is worth less.”
Practise it
Practise putable bond until it is automatic: questions that explain every wrong option.
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