An Extendable Bond is a bond that has more than one possible maturity date due to the fact that it provides for an extendible option and gives the right to extend the initial maturity to a longer period.
Investors use such instruments to change their portfolio terms and to take advantage of changes in interest rates.
As interest rates rise, the bonds are redeemed at shorter maturities; when the interest rates fall, they serve as bonds with longer maturities. The issuer keeps paying coupons on the security should it be extended by the bondholders.
The Extendible Option is usually owned by the investor (although securities with issuer extension option also exist), so this type of security can be compared to puttable bonds.
There is no difference for the borrower between a puttable bond and an extendable bond. If the market rates are below the current coupon, the holder shall not exercise a put option and shall keep the security until maturity. If the rates are higher, the holder shall exercise a put option. Extendable Bond operates in a similar manner and may be deemed equivalent in terms of security valuation. The only difference is that the Extendable Bond is a shorter-dated security that can be extended with the option, and the puttable bond is a longer-dated security the maturity period of which can be shortened.
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