What Is a Death Put?
A death put is a condition included in the agreement for some bonds. It means that in the event of a bondholder dying, his survivors have the right to sell the bond back to the issuer and immediately receive its original face value. The death put is sometimes known as the survivor's option.
In most cases, exercising a put option is technically carried out by the bondholder's estate rather than by an individual. Depending on the specific terms, this usually means the executor of the will must exercise the option. The money paid by the bond issuer then forms part of the estate and can be distributed to heirs in line with the inheritance process.
The terms of a death put are contained in an indenture. This is the legal agreement that sets out the way the bond issue works, and is a mandatory requirement when issuing a bond. The indenture will cover both the terms of the bond, such as its coupon rate and redemption date, and the conditions of the bond such as whether it can be converted into stock.
Investors considering a bond with a death put should carefully check the conditions. For example, there may be a minimum period that must expire after the bond's original issue before the option can be exercised; if the person dies before this period is up, the option is void. There may also be a maximum time limit to exercise the option after the person's death. There may be specific requirements for the survivor to prove she has the legal right to carry out the option, and these requirements may be more complicated than simply being named as an executor of an estate. Some forms of death put will also allow somebody with power of attorney to exercise the option if the bondholder becomes legally incapacitated but is still alive.
The word put in “death put” comes from its wider use in options-based contract. A “put” option is one in which one part in the contract has the right, but not the obligation, to sell a specified asset at a fixed price on a fixed date to the other party. The main difference with the death put is that there is no fixed calendar date; instead the option is triggered by the bondholder's death. The opposite of a put option, a term giving one party the right to sell an asset under fixed conditions, is known as a call option.
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