Death Put: Understanding the Survivors Option
What is a Death Put?
A death put, also known as a survivors option, is a provision added to bonds that provides the heirs of a deceased bondholder the right (but not the obligation) to sell the bond back to the issuer at par value, regardless of the prevailing market price.
Benefits of a Death Put
This option offers several benefits, including:
- Peace of mind for survivors: Guaranteeing par value for the bond eliminates uncertainty for heirs during a difficult time.
- Provides liquidity: Heirs can access the bond's value immediately, even if the market price has declined.
- Avoids potential losses: If interest rates have risen, the market value of the bond may have fallen, but the death put ensures a fair return for the heirs.
When is a Death Put Used?
Death puts are commonly added to long-term bonds, such as corporate bonds or municipal bonds. Issuers often include this provision to attract investors who are concerned about the potential impact of a bondholder's death on their estate.
Other Considerations
It is important to note that death puts generally come with some conditions:
- The option may only be exercisable within a certain period, typically 30 to 90 days after the bondholder's death.
- Some issuers may charge a small fee to cover the costs of exercising the death put.
Overall, a death put provides a valuable option for bondholders and their heirs. It offers peace of mind, liquidity, and protection against potential losses in the event of the bondholder's untimely passing.
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