Callable, Puttable & Secured Bonds — Q&A

Secured bonds are backed by collateral (real estate, equipment, subsidiaries) and are generally safer, issued with lower rates. Unsecured bonds have no collateral — only the issuer’s promise — so they carry more risk and typically offer higher coupons and trade at higher yields.

Accrued interest up to the call date, par value, and any call premium (amount above par). After calling, interest payments stop and the bond ceases to exist.

Issuers typically call when rates fall to refinance at lower coupons — good for the borrower, bad for the lender who loses a high coupon and must reinvest at lower rates. That reinvestment difficulty in a falling-rate environment is call risk, a type of reinvestment risk.

The issuer cannot call the bond for the first five years after issuance. Callable bonds trade at lower prices (higher yields) than similar non-callable bonds to compensate investors for call risk.

The bondholder (not the issuer) controls a put and can sell the bond back at par before maturity. Puttable bonds are especially attractive when interest rates rise, because the holder can return the bond for par instead of selling at a market discount.

The holder can put it back to the issuer for $1,000 par — there is no reason to sell below par in the secondary market when par is guaranteed via the put feature.

Buy bonds back in the open market, or make a tender offer — a formal offer to repurchase securities from current holders, typically at a premium to market price.

Long maturities and low coupons. A 20-year bond falls more than a 1-year bond when rates rise; a 2% coupon bond falls more than a 10% coupon bond for the same reason — less cash flow to reinvest along the way.

Call — fall; issuer. Put — rise; investor. Payment on exercise: call requires accrued interest + par + call premium; put requires accrued interest + par.