Which statement about puttable and callable bonds is true?

• A. Call provisions allow the issuer to redeem before maturity
• B. Sinking fund requirements are only for private equity
• C. Puttable bonds require issuer to redeem on a schedule
• D. Puttable bonds can never be redeemed early

Answer: (A)

The main idea is how bonds can be redeemed before they mature through call or put features. A callable bond includes a call provision that gives the issuer the right to redeem the bond before its maturity date, typically after a specified call date and at a predetermined price. This is exactly what the statement describes—the issuer’s option to redeem early. It’s a tool issuers use to refinance if interest rates fall or to manage debt costs, though it exposes investors to reinvestment risk.

Sinking funds aren’t exclusive to private equity; they’re a general debt-management mechanism used by many bond issuers to retire debt gradually, so the claim about private equity isn’t correct.

Puttable bonds, on the other hand, give the holder the right to compel redemption, not the issuer. They don’t require the issuer to redeem on a fixed schedule; the investor chooses when to exercise the put. And puttable bonds can indeed be redeemed early when the put option is exercised, so the statement that they can never be redeemed early is false.