Callable vs Putable Bonds

Callable and putable bonds represent opposite embedded options in fixed income securities. A callable bond gives the issuer the right to redeem the bond before maturity, typically exercised when interest rates fall — this benefits the issuer at the bondholder's expense. A putable bond gives the bondholder the right to sell the bond back to the issuer at par (or a specified price) before maturity, typically exercised when interest rates rise — this benefits the bondholder at the issuer's expense. Because callable bonds carry risk unfavorable to investors, they offer higher yields than plain bonds. Because putable bonds provide protection favorable to investors, they offer lower yields than plain bonds. Some bonds are both callable and putable. The pricing difference between these structures reflects the value of the embedded option: callable bonds trade at lower prices (higher yields) and putable bonds trade at higher prices (lower yields) compared to equivalent option-free bonds.