Lesson 5 of 7 · All lessons in this module
- Bullet, fully amortizing and partially amortizing bondsVideo lesson
- Sinking funds, waterfalls, zero-coupon and deferred coupon bonds
- Floating, step-up, credit-linked and PIK coupons
- Index-linked and inflation-linked bonds
- Callable and putable bonds
- Convertible bonds, warrants and contingent convertiblesVideo lesson
- Domestic, foreign and Eurobonds; tax considerations
Lesson 5 of 7 · 13 min
Callable and putable bonds
A call lets the issuer buy the bond back early, which caps its price and earns investors a higher yield; a put lets the investor sell it back, which floors its price and costs investors some yield.
In short
- A contingency provision allows an action if an event occurs; in bonds these are rights (not obligations) called embedded options, which cannot be traded separately.
- Callable: issuer may redeem early. Key terms: call protection period, call period, call price schedule (often declining toward par).
- Call risk: uncertain maturity, reinvestment risk and price capped near the call price when yields fall → callable bonds yield more.
- Make-whole call: the issuer pays a price based on a sovereign yield of similar maturity (plus a small spread), usually far above market, so it is rarely used.
- Putable: investor may sell back, usually at par. The put price floors the price when yields rise → putable bonds yield less.
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