Question

Which of the following is the minimum price for a freely puttable bond? Assume the bond will remain freely puttable for the remainder of its life.

Select one:

A. Its PAR Value

B. Par Value minus Accrued Interest

C. Present Value of the PAR Value

D. Par Value plus Accrued Interest

E. The Put Price

Answer 1

ANS: Option (C) ( Present value of PAR Value)

Puttable bond has a put option as holder has a right to demand the early repayment of the principal. Par value is mainly the face value of the bond. Present value of bond represents the sum of all future cash flows from a project, untill its maturity is at full repayment of par value. Suppose at 10%, the bond is invested at $ 100 for 1 year which is at its par value, so the present value of that par value is ($100 * 0.909) = 90.90. so, If $ 90.90 is invested at 10% for 1 year, the holder of bond at the end of 1 year gets a bond of value $ 100.

So, the present vaue of Par value is the minimum price for a freely puttable bond.