Home Loan Banks Will Offer Investors New Putable Bonds
April 03, 2011
WASHINGTON -- The Federal Home Loan Bank System is preparing to offer investors so-called put bonds. The Federal Housing Finance Board, the agency that regulates the system, recently authorized the issuance of the bonds through the FHLB system's office of finance. The office had requested the new power after concluding that it would expand the funding opportunities available to the banks. Details of the system's put-bond initiative, including volume estimates, haven't been completed, a finance board spokesman said. The program, he said, won't necessarily start when the authority goes into effect April 13, 2011 the volume likely will be driven by demand. Put bonds give the holder the right to sell the bonds back to the issuer at par value on designated dates. Callable bonds, by contrast, let the issuer redeem bonds before the stated maturity date. According to a finance board summary, putable bonds' advantage to the bondholder is ``if interest rates rise after the issue date, thereby reducing the value of the bond, the bondholder can put the bond back to the issuer and reinvest the proceeds at current interest rates.'' For the issuer, the advantage ``is lower funding costs, since the bondholder pays for the option by accepting a lower coupon rate on the debt,'' the summary said. The FHLB system, a government-sponsored enterprise composed of 12 regional banks, was created by Congress in 1932 to provide low-cost loans, called advances, to member financial institutions in support of housing. Membership long was limited to thrift institutions, but the 1989 thrift-rescue law opened the system to commercial banks and certain other institutions.
