Put Provision

A put provision allows bondholders to resell their bonds back to the issuers at a specified price (usually at par value) before its maturity date.

A put provision in a bonds indenture, the legal contract between the issuer of the bonds and the trustees of the bonds who represent the bondholders is relatively unusual and is the opposite of a call provision in that the holder makes the decision whether to exercise the put option.

The put provision provides a floor price for the bonds in that issue in that the bondholders know that they can resell their bonds to the issuer at par. This provision gives protection to bondholders against raising interest rates and any other damage in the credit quality of the issue.

However, the price of these advantages is greater than those of the price of comparable bonds without put provision.

Sinking-fund provision
A sinking-fund provision allows the issuer set apart a fund for retirement organizing the bonds in the issue. In a sinking fund type, the issuer chooses to raise the bonds to be retired and then calls to redeem them. After bond have been called these stop gaining interests.

The other type of sinking fund allows the issuer make payments to a trustee which invests the funds. Then, the accumulated amount goes in retiring the bonds at maturity date. Issuers can also re-purchase the bonds in the bond market and later proceed to retire them. This practice happens frequently when bonds are being negotiated at a discount. The difference between a call provision and a sinking fund provision is that the sinking fund provision the issuer is not forced to call the bonds in at a premium price.

The significance of a sinking fund provision is two fold:

  • Provides some security to bondholders because the issuer of a sinking fund provision leaves a an amount of money aside to repay bondholders. Depending on the circumstances, this action could relief the volatility of issuing prices.
  • With a sinking fund plan at random bondholders whose bonds are called receive a repayment of its principal before maturity. That is why sinking fund provisions act as a ceiling price for the bond issue.