Question

Explain the features of callable and puttable bonds. Discuss how they are useful for bond issuers and bondholders.

Answer 1

Answer-

Callable Bonds

Callable bonds are bonds that give the issuer the right to sell or buy back all or part of the bond before maturity.  A callable bond allows firms to pay off their debt early and shield the firms from interest rate drops.
A call provision is beneficial to the issuer because if they are issued at a lower interest rate they can call the bonds.  The issuer benefits from lower intereat rates as Issuing bonds at lower interest rates will cost them less. The decrease in interst rates is due to the decrease in market interest rates or due to improvement od credit quality of issuer which helps them to offer debt at lower rates.

As the  issuer can call the bonds at lower interest rates due to which bondholder are exposed to reinvestment risk.

Puttable Bonds

A putable bond gives the bondholder the ability to sell the bond back to the issuer at a pre specified price on pre specified dates.
The put provision benefits the bondholder.rather than issuer. The decrese in  market interest rates will decrease the current prices of bonds as they were sold when interest rates were lower the bondholder has the option to sell the bond back to the issuer and reinvest the proceeds into a bond that offers a higher rate.

NOTE- Callable bonds benefit the bond issuers whereas the Puttable bond benefits the bond holders.