Putable/Callable/Reset Bonds

Abstract

A callable bond will be paid off before maturity if the issuer finds the interest rate environment favors that strategy. But a putable bond may experience the same fate, at the option of the bondholder. Combining both call and put features in a single bond creates enough contingencies that quite different-seeming instruments may actually be essentially the same. This article examines such a structure and shows both how it behaves and why the ability to take it apart and effectively sell off some of the components as stand-alone options can make it particularly attractive to an issuer.