What is Callable and Puttable Bonds?
Callable bond gives a right to the issuer. The issuer can demand for the bond from the investor at a pre-determined price at the time of its issuance.
Puttable bond gives the investor the opportunity to sell the bond to the issuer again before the completion of maturity period.
Let us understand the difference between callable and puttable bonds as per its characteristics and advantages.
Difference with respect to functioning
Callable Bonds
In case of callable bonds, if the issuer desires to take the bond away from the investor, then he can do so. The amount paid by the issuer is mostly higher than the bond amount. The bond is taken back at a pre-determined price when the bonds were issued at the initial stage.
Puttable Bond
In puttable bond, the investor obtains the advantage of selling the bond to the issuer again if he feels that he is an urgent need of money. The bond is sold at the established price when the bonds were issued. The terms and conditions governing these bonds are similar to other bonds and are clarified at the beginning. There is a lockout period assigned for these bonds. It means within this period, you cannot call or put your bonds for purchase or sell respectively.
Difference with respect to the benefits gained by the parties involved
The callable bond is designed by keeping in mind the interests of the issuer. When the interest rates fall, the issuer may feel that the bonds must be purchased. This decision is taken as a component of the debt refinancing process. Hence, it may straightaway ask the investors to give away their bonds. Now, the investors are at a loss in case of callable bonds. They have to give away their bonds to the issuer when the prevailing interest rates are considerably lower.
In order to overcome this financial loss of the investors, the issuer may promise to give higher returns in the future. Thus, the callable bonds are suitable for the issuer but may serve a drawback for the investors.
While investing in callable bonds, you must understand that you will have to give away your bonds to the issuer when he demands. This is like ‘expecting an unexpected income.’ It means you will receive money suddenly from the issuer when you are not expecting it all. So, you can keep this mindset ready for investing in these bonds. Secondly, you need to discuss with the issuer clearly about the compensation part. Is the issuer really going to compensate for the drawback, how is the compensation beneficial for you, how can you re-invest the money received from these bonds, etc. Keep a backup plan ready at the time of purchase of these bonds. It can surely help when your bonds are called back by the issuer.
On the other hand, puttable bonds are beneficial for the investor. It works on ‘money in need is an investment indeed’ tagline. You can sell your bonds off to the issuer when you are in financial emergency.
Conclusively, callable and puttable bonds have its advantages and loopholes. You need to analyze the same before purchasing these bonds.
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Both callable and puttable bonds has their set of advantages and disadvantages. While for some callable bonds may prove better as it gives access to sudden money, on the other for some puttable bonds is of more value. However, before investing in either of the bond one should analyse its features carefully to understand which kind of bond is more suitable for them.
Callable and puttable bonds have their own pros ans cons. The article basically deals with their features.
The callable appears to be of more benefit to the issuer than to the investor as he has to have a mindset of an “unexpected money”. Though both have advantage s and disadvantages as well, one needs to study their requirement and then decide accordingly.