The presence of an embedded put option reduces the effective duration of the bond, especially when rates are rising. If interest rates are low compared with the coupon rate, the value of the put option is low and the impact of the change in the benchmark yield on the bond’s price is very similar to the impact on the price of a non-putable bond. But when benchmark interest rates rise, the put option becomes more valuable to the investor. The ability to sell the bond at par value limits the price depreciation as rates rise. The presence of an embedded put option reduces the sensitivity of the bond price to changes in the benchmark yield, assuming no change in credit risk.
pls explain
Please Imagine the graph of puttable bonds while reading this.
When the interest rates rise in the market, obviously the price of the bonds will fall and so the investor who is holding the puttable bonds would be exercising his/her put option on the bond. So at higher interest rates/yields in the market, the exercise of the put option becomes more probable and as a result, the price would not fall below the put price thus exhibiting extremely positive convexity (Sir ke bhasa main Antyant sharma ke girta hai price at higher rates)