Stop Order for Bonds

Question

I have a bond and would like to know whether its possible to set something similar to a stop order, i.e. That you make an order to sell the bond if the bond price reaches a specified low value?

My stock broker informed me that this can only be done with stocks and not bonds whether I don't see the reason why it wouldn't be available for bonds as well?

They informed me that the order which can be made with a bond is to sell at a price (or better), which I don't want.. as if it is better, I want to keep the bond as it has a good coupon

Answer 1

In theory it is possible, but generally bond markets are much less liquid and typically have size constraints.

I recall trying to sell some treasuries at below the best bid or offer on a bond trading platform and was not getting filled due to the fact my order size was not large enough. Treasuries are supposed to be quite liquid from a bond standpoint.

If a stop price was reached and you tried to sell at the market, you may find that you do not get filled at all, or at an incredibly bad price. So bad that they do not offer stop orders.

The put provision is something different - if the bond has such a provision in its agreement, it allows the holder of the bond to give it back to the issuer. If the bond you have has such a provision then you could potentially use that instead.

Answer 2

The bond in question would need to have a put provision, defined as follows:

A condition that allows a bondholder to resell a bond back to the issuer at a price - which is generally par - on certain stipulated dates prior to maturity. The put provision is an added degree of security for the bondholder, since it establishes a floor price for the bond. This mitigates the risk of a decline in the bond price in the event of adverse developments such as rising interest rates or a deterioration in the credit quality of the bond issuer.

References

• Put Provision
• Put Bond