Putable bond


I am working on a Schweser QBank question and am confused by the answer. For putable bonds, Z-spread is less than OAS. That means YTM will be lowered due to the “putable” feature. QBank states, “The effective duration of a putable bond is less than its modified duration ignoring the put option.” How can that be? I thought lower YTM increases duration.

Appreciate your helps

The put option is valuable for the investor, and thus the price of a putable bond will be higher than an otherwise identical option-free bond (since the investor has to pay for the put option). Higher price > YTM of the putable bond will be lower.

Regarding duration, if you have a look at the price-yield function, you can see that duration is lower for a putable bond than that of an option-free bond, especially when the YTM is high (the absolute value of the slope of the curve is lower).


And you’re correct, a lower YTM increases duration of option-free bonds and putable bonds.

At low yields, the putable bond behaves almost identically to an option-free bond, so their effective durations are essentially identical (and an option-free bond’s effective duration and modified duration are equal).

At high yields, the price decline for a yield increase is less for a putable bond than for an option-free bond, so the putable bond’s effective duration is less than that of the option-free bond.