What advantage does a participant gain from a bond with a put provision?

What advantage does a participant gain from a bond with a put provision?

• A. The ability to sell the bond back before maturity
• B. Fixed income until maturity
• C. Tax benefits upon sale
• D. Higher interest rates for investors

Answer: (A)

A bond with a put provision allows the bondholder the flexibility to sell the bond back to the issuer at a predetermined price, typically the face value, before the maturity date. This feature provides a significant advantage to the investor, especially in environments where interest rates are rising or if the credit quality of the issuer deteriorates. By having the option to redeem the bond early, the investor can mitigate potential losses or lock in gains if market conditions change unfavorably. This helps in managing investment risk effectively, as the holder is not forced to hold onto the bond until maturity if the investment becomes less desirable. Thus, this unique characteristic is why the put provision is highly valued by bond investors seeking reduced risk.

A bond with a put provision allows the bondholder the flexibility to sell the bond back to the issuer at a predetermined price, typically the face value, before the maturity date. This feature provides a significant advantage to the investor, especially in environments where interest rates are rising or if the credit quality of the issuer deteriorates.

By having the option to redeem the bond early, the investor can mitigate potential losses or lock in gains if market conditions change unfavorably. This helps in managing investment risk effectively, as the holder is not forced to hold onto the bond until maturity if the investment becomes less desirable. Thus, this unique characteristic is why the put provision is highly valued by bond investors seeking reduced risk.