Conservative investors often tend to regard fixed-income investments as “safe” and anything having to do with the stock market as “risky”. Even though the value of bonds and brokered CDs fluctuates in the secondary market, the interest that they pay remains constant until maturity. Many types of fixed-income securities, such as corporate bonds, also pay higher rates than banks or government bonds.But many types of fixed income securities come with a feature that can substantially impact their portfolio holdings.

This feature, known as a “put” or “call” option, can redeem the bond by issuer prematurely at either the issuer’s or the investor’s discretion. Bond issuers usually include call or put features in order to provide either themselves or their customers a way to get out of a note that is either paying a high rate of interest in a low interest rate environment or vice-versa. A put feature is offered to investors as a way to allow them to “put” their bonds back to the issuer if interest rates rise substantially after the bond is issued. In some cases, the investors can even put the bonds back at a premium, or a price above what they paid for the bonds initially. This type of feature can be attached to a bond issue as an incentive for investors.

The call feature works in reverse; the issuer does not want to have to keep paying a higher rate on its bonds if rates drop after the note is issued. For example, if a company issues a 9% bond and three years later rates drop to 5%, then the company obviously won’t want to keep paying the higher rate to its bondholders, so it can include a call feature stating that the company has the right to call the bonds back at a certain price (usually par, but again a premium is sometimes paid) at a given point in the future, such as five years from issuance. A final point to remember concerning put and call features is that bonds with call features will usually pay a slightly higher rate than an identical security that is non-callable. Conversely, put features can slightly lower the rate on a bond compared to non-puttable securities.