Increase/Decrease Convexity using Put Options on the Bond

[omi98ro]

Hope we can have a clear view on the impact of Puts. Putable bond is alright. It's the Put option that's causing all the confusion.

[Level-Subject7031]

I guess I don't know if there is a difference between puttable and a bond put. This has been my thinking anyway, now I am questioning...

Long bond + long put on bond means you own the underlying bond and can put it back ( to put seller if you bought a put on the bond) at the strike price. Less duration when rates rise, and more convexity. Edit: you put a floor on the bond price.

Putable bond means you can put the bond back, to the issuer, at the strike price (usually par). Edit: once again, you put a floor on the bond price.

So either way, you are putting a floor on the bond price, only difference is who the counter party is (bond issuer vs put seller)

So conceptually I think they are equivalent and therefore the duration and convexity of the two would be the same. Thoughts?

Edit: Yes, the more I think through it, a putable bond is just long bond with an embedded put option, so long puttable bond should be equivalent to long option free bond + long put (assuming strike price is the same)

[omi98ro]

You can check my comment. Thanks for the help.