Callable, putable, convertible, inflation-linked

Plain-vanilla bonds pay fixed coupons and fixed principal. Many real-world bonds carry additional features — embedded options, inflation indexing, conversion rights — that complicate the cash flows and the pricing. A working analyst should be able to recognise each major structure on sight and to articulate how it changes risk and return.

Callable bonds

A callable bond gives the issuer the right (not the obligation) to redeem the bond before maturity at a pre-defined call price. Issuers exercise this option when interest rates have fallen, refinancing the higher-coupon callable bond with cheaper new debt. For the bondholder, this is exactly the wrong scenario: yields have fallen, your bond should be worth more, but the issuer cancels it and pays you only the call price. As a result, the bond's price-yield relationship flattens at low yields and never rises as much as a plain-vanilla bond would. This is negative convexity — the structural property that makes callable bonds unattractive when rates are falling.

Callable bonds compensate the buyer with a higher coupon at issuance. The size of the coupon premium is the value of the embedded call option, calculated via a binomial or Monte Carlo tree.

Putable bonds

A putable bond gives the bondholder the right to sell the bond back to the issuer at a defined price on defined dates. The buyer exercises when interest rates rise (the bond's market value falls below the put price). The embedded option benefits the bondholder, so putable bonds carry lower coupons at issuance than plain-vanilla bonds. Putable structures are common in emerging markets, where investors demand the protection against political and credit shocks.

Inflation-linked bonds (TIPS, Linkers)

Treasury Inflation-Protected Securities (TIPS in the US, index-linked gilts in the UK, OATis in France) link both principal and coupons to a published inflation index. The investor gets a real (inflation-adjusted) yield rather than a nominal one. The difference between nominal Treasury yield and TIPS yield at a given maturity is the 'breakeven inflation rate' — the inflation rate implicit in market prices.

Breakeven inflation ≈ nominal yield - TIPS yield

Convertible bonds

A convertible bond is a corporate bond plus an embedded option to convert the bond into a defined number of shares in the issuer. The bondholder gets a lower coupon than they would on a comparable straight bond, in exchange for the upside if the issuer's share price rises. From the issuer's perspective, the convertible delays equity dilution and lowers the immediate interest expense.

Convertible value ≈ value of a straight bond with the same terms + value of the embedded equity call option

Convertible bond analysis is done by convertible-arbitrage funds, which decompose the convertible into its bond and option components and hedge each separately. The strategy is more art than science because convertible terms vary widely (call provisions, change-of-control protections, dividend protection mechanics).

Floating-rate notes

Floating-rate notes pay a coupon that resets periodically to a reference rate plus a fixed spread. Reference rates are typically SOFR (USD, replacing LIBOR) or a CBR-based rate (KES). FRNs have very low duration because the coupon adjusts with the curve, leaving them mostly exposed to credit risk rather than interest-rate risk. They are useful for floating-rate-mandated investors and during expected rate-hiking cycles.