Adjustable long term putable security

3 key takeaways

• These securities have adjustable interest rates that can change periodically.
• They include a put option, allowing investors to sell the bond back to the issuer at certain times.
• They offer flexibility to investors in managing interest rate risk and liquidity.

What is an adjustable long-term putable security?

An adjustable long-term putable security is a type of debt instrument that combines features of adjustable-rate bonds and putable bonds. The interest rate on these securities adjusts periodically based on a benchmark rate, such as the LIBOR or the U.S. Treasury rate. Additionally, these bonds include a put option, which grants the holder the right to sell the bond back to the issuer at predetermined intervals, typically at par value or a specified price.

Importance of adjustable long-term putable securities

Adjustable long-term putable securities provide investors with flexibility and protection against interest rate risk. The adjustable interest rate helps ensure that the bond’s yield remains competitive with current market rates, while the put option allows investors to exit the investment if the bond’s terms become unfavorable or if they need liquidity. These features make such securities attractive to investors seeking both income and safety.

How adjustable long-term putable securities work

1. Issuance: The bond is issued with an adjustable interest rate and a put option.
2. Interest rate adjustment: The interest rate on the bond adjusts periodically according to a specified benchmark rate.
3. Put option exercise: At specified intervals, the bondholder has the option to sell the bond back to the issuer. This can typically be done at par value or at a pre-agreed price.
4. Investor flexibility: The investor benefits from potentially higher interest rates in rising rate environments and the ability to redeem the bond if needed.

Examples of adjustable long-term putable securities

• Corporate bonds: A company issues a 20-year bond with an interest rate that adjusts annually based on the LIBOR rate. The bond includes a put option that allows investors to sell the bond back to the company every five years.
• Municipal bonds: A municipality issues a 15-year adjustable-rate bond with a put option exercisable every three years, providing investors with flexibility and periodic liquidity options.
• Government bonds: A government issues a 10-year adjustable-rate bond linked to the U.S. Treasury rate with a put option that can be exercised every two years.

Real-world application

Consider an investor who purchases a 20-year adjustable long-term putable bond issued by a corporation. The bond’s interest rate adjusts every six months based on the LIBOR rate, ensuring that the investor receives a competitive yield in varying interest rate environments. Every five years, the investor has the option to sell the bond back to the issuer at par value. If interest rates rise significantly or the investor needs access to cash, they can exercise the put option to redeem the bond early.

Understanding adjustable long-term putable securities is important for investors seeking to manage interest rate risk and maintain flexibility in their investment portfolios. These bonds offer a combination of adjustable returns and liquidity options that can help investors navigate changing market conditions. To further explore related concepts, you might look into bond pricing, interest rate risk, and fixed-income investment strategies.