Glossary

Retractable Bond

Is a bond which is payable at par to its holder on demand once the lock-out or deferment period expires. This bond combines a bond with a put option allowing the holder the right to early redeem the principal on the bond. The put feature establishes a floor on the bond price, regardless of the increase in interest rates before maturity. However, the bond’s cash flows are identical to a normal bond. Therefore, in order to price a retractable bond, it is necessary to first determine the value of the underlying debt as normal debt using the discounted cash flow approach. Then, the put feature is measured as the benefit of holding or exercising the embedded option using an option pricing model, based on the value of the debt at different option valuation dates over the bond’s time to maturity. It follows that the value of a retractable bond is equal to its cash flows plus the value of the put feature.
This bond is also known as puttable bond, put bond, or putable bond.
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