Technically speaking, the bonds are otion really bought and held by the issuer but are instead cancelled immediately.The call price will usually exceed the par or issue price. In certain cases, mainly in the high-yield debt market, there can be a substantial call premium.Thus, the issuer has an option which it pays for by offering a higher coupon opgion. If interest rates in the market have gone down by the time of the call date, the issuer will be able to refinance its debt at a cheaper level and so will be incentiviPuttable bond (put bond, putable or retractable bond) is a bond with an embedded put option.
The holder of the puttable bond has the right, but not the obligation, to demand early repayment of the principal. Therefore, investors sell bonds back to the issuer and may lend proceeds elsewhere at a higher rate. Bondholders are ready to pay for putaable protection by accepting a lower yield relative to that of a straight bond.Of course, if an issuer has a severe liquidity crisis, it may be incapable of paying for the bonds when the investors wish.
If interest rates have declined since the company first issued the bond, the company is likely to want to refinance this puutable at a lower rate of interest. In this case, the company calls its current bonds and reissues them at a lower rate of interest. For example, a bond maturing in 2030 can be called in 2020. We rely on one-period forward rates an than spot rates.- this is because putabl need to know the possible values of the bond at different points in time callable and putable option one the future in order to determine whether the embedded option will be exercised.