Put bonds are bond issues where the buyer has the option of forcing the seller to repurchase the bond at specific points during the life of the security. This is in contrast to a call bond, where the issuer of the bond has the option of settling the investment prior to the original maturity date. The terms and provisions that govern the purchase and eventual settlement of the put bond will include information regarding the repurchase price that may be claimed at each specified point. In most cases, this price is set at the face value of the bond, which is also known as the par value.
There are several different names associated with the put bond. This type of bond issue may be known as a multi-maturity bond, owing to the fact that the buyer can initiate the repurchase at one or more periods of the bond’s life. A put bond may also be known as a variable rate demand obligation or an option tender bond, since the bond does not have to be held until full maturity is reached. While different names are favored in different cultures, investment professionals are usually familiar with all the titles that may be assigned to this type of bond issue, and can identify the bonds for their clients with relative ease.
The structure of a put bond may allow the buyer or holder of the bond issue to initiate a repurchase at one specified point during the life of the security, or be able to exercise that option at several specific points during the bond’s life. When the bond provisions allow a single point for repurchase, this is normally referred to as a one-time put bond. Should the bond be structured to allow several points of repurchase that can be initiated by the holder, this is sometimes referred to as a multiple put bond.
While the put bond does offer the advantage of allowing the holder to redeem the bond and recover his or her investment before the security fully matures, there is a drawback to consider. In most cases, the return on the bond will be less than originally projected. While the investor will recover the face or par value of the bond, the interest may be reduced considerably, or non-existent. For this reason, investors should look closely at the terms and conditions that govern the bond issue, especially in reference to what type of return can be expected at each point where the repurchase option may be exercised.
