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CFA Level I · CFA Level I Exam · Fixed-Income Markets for Corporate Issuers

An investor holds a corporate bond with a put provision. Relative to an otherwise identical bond without the provision, the putable bond most likely:

The putable bond most likely trades at a higher price. The put gives the holder the right to sell the bond back to the issuer at a set price, which is valuable to the investor, so it adds to the value of an otherwise identical straight bond.

  1. Atrades at a lower price because the issuer may redeem early
  2. Btrades at a higher price because the holder may sell it back to the issuerCorrect
  3. Ctrades at the same price because the option is exercised at par

Explanation

A put option benefits the bondholder, who can sell the bond back at a set price, for example if rates rise or credit quality falls. This right has value, so the putable bond is worth more than an otherwise identical straight bond.

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