How does yield to put work and when does it matter?

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AcadiFi · Accepted Answer

Yield to put (YTP) is the IRR assuming the bondholder exercises the put option at the first put date, selling the bond back to the issuer at the put price. The holder puts when market rates rise and price falls below the put price — the put acts as a floor. Formula: P = Σ [C / (1 + y/m)^t] + PP / (1 + y/m)^(n_put×m), where PP = put price. Example: Vailgorde Municipal 3.80% semi-annual bond, $1,000 par, 12 years to maturity, puttable in 4 years at $1,000. Current price = $912 (bond has fallen because rates rose). YTM to maturity: ~4.80%. YTP to 4-year put: solve $912 = Σ [$19 / (1 + y/2)^t] + $1,000 / (1 + y/2)^8 for t = 1..8. Try y = 6.30%: PV = $19 × 7.085 (annuity 8 at 3.15%) + $1,000 × 0.7767 = $134.62 + $776.70 = $911.32 — very close. So YTP ≈ 6.30%. YTP (6.30%) > YTM (4.80%), so yield-to-best (from holder's perspective) = 6.30%, making exercise of the put economically attractive. For puttable bonds at a discount, YTP typically exceeds YTM because putting at par generates greater yield than waiting for amortization to par over a longer period. Analysts use YTP for convertible bond analysis (effective floor value) and for municipal bonds with put features that protect against rising rates.

How does yield to put work and when does it matter?

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