Abstract:
Based on the perspective of the game between issuers and investors, this paper studies the setting and exercise of the put provision of the corporate bonds. The results show that: (1) The setting and exercise of the put provision of the corporate bonds are the results of the game between issuers and investors with the aim of maximizing their own interests. (2) In the stage of bond issuance, the fundamental purpose of the issuer’s setting of the put provision is not to actively provide investors with a tool to avoid interest rate risk, but to reduce the coupon rate and control financing cost. The purpose for investors seeking the put provision is to obtain the right to sell the bonds back to the issuers in order to prevent the upside risk of the market interest rate. (3) When entering the selling back date, whether the issuer increases the coupon rate is mainly determined by its own financial situation. Issuers with weak solvency will generally raise the coupon rate to avoid investors exercising the put option, thereby reducing the repayment pressure faced by the company at that time. The primary determinant of whether an investor exercises the put option is the company’s credit risk, rather than whether the coupon rate is lower than the market interest rate for the same period.
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