Posted in Finance, Accounting and Economics Terms, Total Reads: 445
Definition: Put Provision
Put Provision is the feature of the bond that allows the bondholder to resell the bond to the issuer of the bond, generally priced at par, at a certain date before maturity. The put provision gives the right to the bondholder to receive back the principal of the bond at any time before maturity.
Thus it is an added security for the bond holder as whenever they feel that the financial health of the company is deteriorating and hence the company will not be able to pay back even the principal amount raised, they can ask the company to repay their bond amount. This provision also helps in protecting the investor from reinvestment risk. As and when a bond holder feels that they can generate more profit from investing in a venture other than the current bond they can ask the issuer to repurchase the bond. This clause will help combat interest rate volatilities also, thus when the bond prices goes down due to decline in interest rates the bond holder can exercise its put provision.
Since this put provision gives an added optionality and protection to the bondholder, the bonds with put provision are generally priced higher than those without this put provision.