Callable Putable Bonds with Matching Exercise Dates and Strikes
Summary
The discussion considers a bond where the holder’s put and the issuer’s call are available on the same date at the same price. The response says such structures are relatively common, including in convertible bonds, and that the shared exercise date can effectively become the bond’s maturity for trading purposes. The stated rationale is that the issue may still count as a longer-term liability for accounting while offering investors a nearer date at which the bond can be redeemed.
A second response cautions that the full offering terms matter, including any reference triggers. It describes historical examples in which the apparent bond structure was economically a shorter-dated bond combined with an embedded option on a Treasury constant-maturity yield, and alleges that this option was priced richly relative to comparable over-the-counter options. That example is anecdotal and specific to particular issues; it does not establish that all bonds with matching put and call terms have the same economics. Reviewing the offering memorandum is essential to understand the actual payoff and conditions.
Key ideas
- Matching holder put and issuer call terms can make the exercise date an effective trading maturity.
- A longer stated maturity may serve an accounting purpose while a nearer exercise date appeals to investors.
- Convertible bonds are mentioned as an area where these structures occur.
- Offering documents and reference triggers determine the instrument’s actual terms.
- One historical account interprets certain issues as short bonds plus an embedded, richly priced rate option.
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Full text
# Is "Issuer and Holder with same strike" meaningless? # Is "Issuer and Holder with same strike" meaningless? I've seen a callable putable bond whose first exercise date is an exercise date both for the holder and the issuer. Moreover both strikes have the same value: 100. I wonder what does it mean. I guess this bond is doomed to be redeemed at the first exercise date. Thus it's payoff is deterministic. I have the impression that those contracts where issuer and holder have options at the same dates with the same strike have been poorly designed. ``` Am I wrong? ``` ## Answer by Brian B (score 2, accepted) https://quant.stackexchange.com/a/9122 These are relatively common, especially in convertible bonds. You are correct that the effective maturity of the bond becomes the call/put date. The reason for issuing them is fairly prosaic: a 10 year bond with a 3 year call/put date counts as a 10 year liability for accounting purposes, and of course a 3 year instrument for trading purposes. The latter can help make the issue attractive to investors. ## Answer by KnewGuy (score 1) https://quant.stackexchange.com/a/9120 UBS launched a series of these around 1997-98. One needs to see the Offering Memorandum to see the full details and the reference trigger for the put and call. In the case of the UBS bonds (they were the ibanker, not the issuer), they issues 3/10 and 3/30 put-table and callable bonds. What they really were (and what these probably are): the bond buyer bought a 3 year bond with an embedded UST CMT option in it that is WAY overpriced. In the case of the UBS bonds, I don't recall the specifics of the underlying option tenor, but the implied vol on the embedded option was marked up about 100% from what a similar OTC option would have traded at. Under ALL circumstances it was a 3 year issue and the bond buyer also bought a way overpriced CMT option. Hope this helps.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.