Investments, tenth edition

  Puttable Bonds   

While the callable bond gives the issuer the option to extend or retire 

the bond at the call date, the  extendable  or    put  bond    gives this option to the bondholder. 

If the bond’s coupon rate exceeds current market yields, for instance, the bondholder will 

choose to extend the bond’s life. If the bond’s coupon rate is too low, it will be optimal not 

to extend; the bondholder instead reclaims principal, which can be invested at current yields.  

  Floating-Rate Bonds   

   Floating-rate  bonds    make interest payments that are tied to 

some measure of current market rates. For example, the rate might be adjusted annually 

to the current T-bill rate plus 2%. If the 1-year T-bill rate at the adjustment date is 4%, the 

bond’s coupon rate over the next year would then be 6%. This arrangement means that the 

bond always pays approximately current market rates. 

 The major risk involved in floaters has to do with changes in the firm’s financial 

strength. The yield spread is fixed over the life of the security, which may be many years. If 

the financial health of the firm deteriorates, then investors will demand a greater yield pre-

mium than is offered by the security. In this case, the price of the bond will fall. Although 

the coupon rate on floaters adjusts to changes in the general level of market interest rates, 

it does not adjust to changes in the financial condition of the firm.