posted on 06-06-2019

Premium Put Convertible Bond

Updated October 1, 2019

What is a Premium Put Convertible Bond?

A premium put convertible bond is a bond that can be redeemed by the investor at premium before its maturity date.

How Does a Premium Put Convertible Bond Work?

Premium put convertible bonds have a feature comparable to a put option that permits the holder to redeem the bond at a premium in advance of maturity date. For example, an investor who owns a hypothetical premium put convertible bond with a par value of $1,000 but a market value of $1,200 can force the issuer to buy the bond back for its $1,200 market value. 

Why Does a Premium Put Convertible Bond Matter?

Premium put convertible bonds give investors the opportunity to benefit from an increase in market value. It should be noted that the coupon rate for premium put convertible bonds is generally lower than that of regular bonds because the investor is receiving potential upside on the bond price instead of higher guaranteed interest payments.