Survivor put option- bonds
If you are an older investor looking to generate the most income you can by opting for longer-term bonds, you also may be concerned that these investments are likely to see their prices decline more than short-term bonds as interest rates begin to rise.
This means that your heirs could take a hit if they want to cash out your bond holdings after your death, without waiting a long time for them to mature. Previous Next 1 of 5. A death-put feature on a bond would allow your estate, after you die, to present a bond that has this feature to the bond issuer for redemption at its issue price, or at par value, before the maturity of the investment.
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Certificates of deposit also offer this feature so that your estate could redeem the CDs prematurely after you die, without paying a penalty for early redemption. Typically, brokered CDs offer this feature. A basis point is one-hundredth of 1 percent.
You would have to look at the terms of a bond issue to see if it comes with a death-put option. We see these all the time as an added feature. Previous Next 2 of 5. Generally, there is a waiting period before your heirs can benefit from a death-put option.
This depends on the terms of the issuance but is typically six months or even one year after you die. Alternatively, some companies could stipulate a minimum holding period of a year after the bond issuance. Also, there are typically restrictions on the amount of death-put bonds that a company will redeem each year. For instance, a company could restrict the death-put redemptions to 2 percent of the bond issuance value per year. And, there could be restrictions on the amount of redemptions allowed by any individual estate each year.
One way to deal with the redemption limits is to have a diverse portfolio made up of bonds issued by many companies, says Jody Lurie, a corporate credit analyst with Janney Montgomery Scott in Philadelphia. Previous Next 3 of 5.
There are some risks associated with the death-put feature. For one, the bonds could be callable. This means that the issuer could call the bonds, meaning that they would redeem them before they are due to mature.
So, you might have taken on a lower yield to add on a death-put feature in vain. This is more likely to happen in an environment in which interest rates are falling, because companies would like to redeem bonds issued at a higher interest rate and issue bonds at a lower interest rate in order to save on money paid in interest. Additionally, these bonds are not the most liquid, so investors who might, for whatever reason, want to sell them before they mature might not be able to easily, Lurie says.
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Previous Next 4 of 5. And if your heirs decide after your death that they would like to follow a different investment strategy, your estate would be able to use the death-put feature to cash out your bond or CD holdings and pass on your wealth without diminishing it. In the meantime, you too can reap the higher interest rates of longer-term bonds without worries about preserving your wealth.
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