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Definition: Death Put
Death Put also called Survivor’s option is an option embedded in a fixed income security that gives the bond holder’s estate or representative, the right but not the obligation to sell the bonds back to the issuer at face value in case of death of the beneficiary, subject to certain conditions. It is usually used as an estate planning tool so that the estate of the deceased can use it to sell back to the issuer. It generally comes at a cost to the bond holder (generally a fees of about 0.125% a year) as it involves a direct cost or a low rate of return.
Certain conditions that may be embedded in the agreement are as follows:
1. A minimum amount of holding period is specified such as 6 to 12 months
2. Limit on the total amount that can be resold
3. Limits for an individual decease owner
4. Differing criteria based on different bodies holding say Joint account, trust, individual etc.
The bond holder may choose to redeem the bond in two different ways depending on the market conditions. In case the interest rates have reduced and hence the bonds are trading above par, it is imperative to sell them in the market. However, in case the interest rates are high and bond is trading below par, the representative may choose to utilise the option and hence sells them back to the issuer at par value.
Death Puts still have substantial amount of credit risk as most of the companies that issue them are financial services companies which means it’s a huge exposure to a single sector of the economy. While CD’s are protected by the Federal Deposit Insurance Co., there is no such protection for Death Puts. Another risk they have is that some bonds are “Callable”, that is they can be retired early by the issuer if the interest rates are lower. In such case the holders have to bear the risk of investing in a low interest rate environment.