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What type of bond provides investors with the right to sell the bond back to the issuer before maturity?
Callable Bonds
Putable Bonds
Coupon Bonds
Agency Bonds
The correct answer is: Putable Bonds
Putable bonds are designed to give investors the right to sell the bond back to the issuer before its maturity date, typically at par value. This feature is particularly valuable in a rising interest rate environment, as it allows investors the flexibility to minimize potential losses from declining bond prices. By exercising this option, investors can redeem their bonds and reinvest in new securities offering higher yields. The unique aspect of putable bonds compared to other bond types is this embedded option, which adds a level of protection for the bondholder against interest rate risks. In contrast, callable bonds allow issuers to redeem bonds before maturity, thus protecting the issuer's interests rather than the investor’s. Coupon bonds refer to bonds that pay periodic interest but do not offer the put or call features. Agency bonds are issued by government agencies and may carry different risk profiles and benefits but do not inherently provide the right for investors to sell back to the issuer.