Callable Bond vs Putable Bond: Who Holds the Option
Short answer. A callable bond lets the issuer redeem it before maturity at a set price, which they do when rates fall; the investor is paid back early and must reinvest at lower rates, so callable bonds pay a higher yield. A putable bond lets the investor sell it back at par, which protects against rising rates, so it pays a lower yield.
Side by side
| Callable bond | Putable bond | |
|---|---|---|
| Who holds the option | The issuer | The investor |
| When it is exercised | When rates fall | When rates rise or credit weakens |
| Yield versus a plain bond | Higher | Lower |
| Price behaviour | Price gains are capped near the call price | Price floor near the put price |
| Convexity | Negative at low rates | Positive |
| Main risk to holder | Reinvestment risk | Paying for protection that may not be used |
| Typical issuers | Corporates and municipals | Fewer; some corporates and structured notes |
Which one fits you?
Lean towards Callable bond if…
- you want extra yield and accept early redemption
- you buy for income and can reinvest
Lean towards Putable bond if…
- you worry rates will rise
- you want a known exit price
Frequently asked questions
Why do companies issue callable bonds?
To refinance cheaply if rates drop. They pay for that flexibility with a higher coupon.
What is yield to worst?
The lowest yield you could receive across all call dates and maturity. It is the conservative way to quote a callable bond.
Is a putable bond safer?
It protects against rising rates and some credit deterioration, but not against the issuer failing before you exercise.
General education, not personal financial advice. Figures are typical US examples and vary by provider and year.