Puttable Bonds in India: Meaning, Types & Key Benefits

Imagine a company planning a major expansion. To raise funds, it issues bonds—essentially borrowing money from investors like you. Each bond has a face value (the amount you’ll get back at maturity), a coupon rate (the interest you earn), and a maturity date (when you’re repaid in full). But what if, during the bond’s life, interest rates rise or the company’s prospects change? That’s where puttable bonds step in, offering investors a unique safety net.

What is a Puttable Bond?

Suppose you’ve invested in a bond, but a year later, interest rates climb sharply. New bonds now offer much higher returns, and your old bond loses value. With a puttable bond (also called a put bond or put option bond), you’re not stuck. You have the right, but not the obligation, to sell your bond back to the issuer at a pre-agreed price before maturity.

Puttable Bond Meaning: A puttable bond is a fixed-income security that gives the bondholder the right to demand early repayment of the principal from the issuer, typically at par value, on specified dates before the bond’s scheduled maturity.

This feature acts as a shield against rising interest rates or deteriorating credit conditions. If market rates rise or the issuer’s health declines, you can “put” the bond back and recover your capital, ready to reinvest in better opportunities.

Key Features:

• Right to early redemption at predetermined dates
• Protection against rising interest rates
• Lower yields compared to standard bonds (since you pay for this flexibility)
• The price is typically higher than a plain-vanilla bond

Types of Puttable Bonds

Let’s say you’re evaluating different types of bonds for your portfolio. Not all puttable bonds are created equal; some offer more flexibility than others.

Multi-Maturity Bonds

These allow you to sell the bond back to the issuer on several specific dates during the bond’s life. For example, a 10-year bond might let you exercise the put option at the end of year 3, 5, or 7.

Option Tender Bonds

Typically floating-rate and backed by municipal or tax-exempt bonds, these let you request early repayment and are often used in government or infrastructure projects.

Variable Rate Demand Obligations (VRDO)

These are long-term bonds where you can demand repayment at any time, with the interest rate adjusting to current market conditions.

Each type caters to different investor needs, whether you want regular exit opportunities or the ability to redeem on demand.

Key Advantages of Puttable Bonds

Consider an investor who wants to invest in bonds but is wary of interest rate hikes or market volatility. Here’s where puttable bonds shine:

• Interest Rate Protection: If rates rise, bond prices fall. With a puttable bond, you can redeem early and reinvest at higher yields, minimising losses.
• Credit Risk Mitigation: If the issuer’s financial health worsens, you can exercise the put and recover your principal before things deteriorate further.
• Liquidity: Need cash for a new opportunity or emergency? The put option gives you planned exit points, adding flexibility to your investment strategy.
• Portfolio Stability: By mitigating downside risk, puttable bonds help maintain a more stable portfolio value, particularly in uncertain market conditions.

Bondbazaar offers a wide selection of over 10,000 bonds, including puttable bonds, across government and corporate categories. The real-time trading platform allows you to buy and sell bonds with a single click, with zero account opening or brokerage fees, making it easier to access and manage these flexible instruments.

Disadvantages of Puttable Bonds

No investment is perfect, and puttable bonds come with trade-offs:

• Lower Yields: Issuers compensate for the added risk of early redemption by offering lower coupon rates compared to similar non-puttable bonds.
• Higher Price: The embedded put option means you’ll pay a premium versus standard bonds.
• Limited Upside: If interest rates fall, you won’t benefit as much as with a callable bond, where issuers might redeem and refinance at lower rates.
• Issuer Risk: If the issuer faces financial difficulties, early redemption may not always be smooth, especially during extreme market stress.

Comparison: Puttable Bonds vs. Callable Bonds

Let’s compare both to clarify the difference:

• Puttable bonds empower investors to manage risk and regain capital when needed.
• Callable bonds favour issuers, letting them refinance if rates drop.

Suppose a corporation issues a 7-year puttable bond with a 7% coupon, and the put option is exercisable at the end of years 3 and 5. If, after three years, market interest rates rise to 9%, the bond’s price drops. As an investor, you can exercise the put, get your principal back, and reinvest in new bonds at the higher rate.

This flexibility is especially valuable in uncertain economic cycles or when market rates are volatile.

Should You Invest in Puttable Bonds?

For investors who value capital protection and flexibility, puttable bonds are a strong choice. They’re ideal for those concerned about rising rates or issuer risk, and they fit nicely in portfolios seeking stability.

How Bondbazaar Helps You Invest in Puttable Bonds?

Bondbazaar makes it seamless to invest in puttable bonds, offering real-time trading, expert guidance, and zero hidden charges. With bonds held in demat form and payments credited directly to your account, managing your bond investments has never been easier.

Conclusion

Puttable bonds give you, the investor, more control over your investment’s fate. While you may accept a slightly lower yield, the peace of mind and flexibility can be well worth it, especially in unpredictable markets. Always weigh the pros and cons, and consider your own risk tolerance and investment goals before you invest in bonds with embedded options.

Frequently Asked Question

What is the main advantage of puttable bonds?

They offer protection against rising interest rates and credit risk by allowing early redemption.

What is a Puttable Bond?

A puttable bond is a fixed-income security that gives investors the right to sell the bond back to the issuer at a pre-set price before maturity. It helps reduce interest rate and credit risk by offering early redemption options.

Are puttable bonds safe?

Puttable bonds offer more flexibility and risk control than regular bonds, but safety still depends on the issuer’s credit rating.

Do puttable bonds have lower returns?

Yes, they generally offer lower yields due to the embedded put option that favours the investor.