Death Put

The addition of a death put option to a bond that gives the bondholder the right to sell the bond back to the original issuer at full or par value in the event of the bondholder death or legal incapacitation. The bondholder is not obligated to sell the bond. 

Another term for a death put is a "survivor's option."

A death option is similar to a put option on a stock or other asset, in that the holder has the choice to exercise it when meeting certain conditions. In this case, the death or the legal incapacitation of the bondholder. It is an optional redemption feature sold with the bond itself allowing the beneficiary of an estate to put, or sell, the bond back to the issuer. Proceeds from the sale become part of the estate funds. 

Usually, the prices of fixed-income debt instruments and interest rates have an inverse relationship, although supply and demand can alter this. Fixed-income investments return periodic, regular income. Debt instruments include items like bonds, notes, and debentures. As interest rates increase, the open market price of fixed-income debt instruments holdings will decrease. The death put option protects the bondholder's estate when interest rates are higher than they were at the time of original purchase.

Bonds may include the death put feature to make them more attractive to the bond buyer, although the holder may have to accept a lower interest rate in return for this safety. Redemption features such as this put a floor under the price to protect the bondholder. Usually, it is protection from interest rate changes, but in this case it is protection from a very specific event.

The main benefit for the bondholder is that interest rate risk at the time of death is eliminated. Higher interest rates will not hurt the value of the bonds at the time of the bondholder's death. 

If the bondholder dies and interest rates are lower than those at origination, the price of the bond will be higher. Therefore, the estate can go into the open market to sell the bonds and receive a premium above the par value, just as with any bond. Again, because of the specialized nature of the death put, even though the original buyer is deceased, it still might be difficult to sell the bond.

The main problem for the bondholder is that the secondary market will be limited should the buyer wish to sell the bond before either maturity or their death.

There is one other caveat and that is a call, or early redemption, feature that could be included in the bond's indenture contract. Early redemption allows the issuer to buy back, or call the bond before maturity. Typically early redemption happens because interest rates fell enough to make refinancing the debt a good strategy. In this case, the bondholder who already accepted a lower interest rate to start, will lose the bonds and have to reinvest the proceeds at a lower interest rate.