Financial analyst

Options Granted to Bondholders

A bond issue may include a provision that gives either the bondholder and/or the issuer an option to take some action against the other party. The most common type of option embedded in a bond is a call feature, which was discussed earlier. This option is granted to the issuer. There are two options that can be granted to the bondholder: the right to put the issue and the right to convert the issue.
An issue with a put provision grants the bondholder the right to sell the issue back to the issuer at a specified price on designated dates. The bond with this feature is called a putable bond and the specified price is called the put price. The advantage of the put provision to the bondholder is that if after the issue date market rates rise above the issue’s coupon rate, the bondholder can force the issuer to redeem the bond at the put price and then reinvest the proceeds at the prevailing higher rate.
A convertible bond is an issue giving the bondholder the right to exchange the bond for a specified number of shares of common stock. Such a feature allows the bondholder to take advantage of favorable movements in the price of the bond issuer’s common stock. An exchangeable bond allows the bondholder to exchange the issue for a specified number of shares of common stock of a corporation different from the issuer of the bond.