In this example, we look at a puttable bond. The below bond is puttable at 90. It was originally issued when interest rates were very low. Rates have since increased significantly. And the yield to maturity for a non-puttable straight bond with the same terms is 10%. What will the investor in these bonds do? So this is a puttable bond. It means that the investor has a put option on the bond so he can sell this at a predefined price if he chooses to do so. So what will the investor in these bonds do in this example here? Well, first of all, we calculate the price of a non-callable equivalent bond here, and we know that the yield to maturity now is 10%.

So minus the PV Function, the rate being 10% now, the remaining time to maturity is a five year bond, it's got a 5% annual coupon, or five annual coupon, and a par value of 100, close the brackets. And we see the price of a non-callable equivalent bond is 81.

So what will the investor in these bonds do? Well, the investor in these bonds will of course, sell these back to the issuer at 90. Effectively, what the investor can do now is sell these bonds back at 90. And if he chooses to buy other bonds with exactly the same terms other than not being callable for 81 and monetize the difference. So in conclusion, the investor will demand early repayment as 90, which is the callable price, is bigger than 81.