Explain why you agree or disagree with the following statement: "The value of a putable bond is never greater than the value of an otherwise comparable option-free bond."

What will be an ideal response?

As described below, one would not agree with the statement.

For a putable bond, the bondholder has the right to sell the bond to the issuer at a designated price and time. A putable bond can be broken into two separate transactions. First, the investor buys a noncallable bond. Second, the investor buys an option from the issuer that allows the investor to sell the bond to the issuer. The price of a putable bond is then:

putable bond price = nonputable bond price + put option price.

Given that the value of a put option is never negative and in most (if not all) cases in positive, the value of a putable bond is always greater than or equal to the value of a nonputable or noncallable bond or option-free bond. Thus, the statement is false.