Answer: The VaR will decrease.

A puttable bond gives the bondholder the right to sell the bond back to the issuer at a predetermined price (the put price). This feature has the following effects on VaR: 1. **Downside protection**: The put option provides a floor price for the bond. When interest rates rise (bond prices fall), the bondholder can exercise the put option and sell the bond at the put price, limiting the downside risk. 2. **Reduced volatility**: The put feature reduces the potential losses, which in turn reduces the overall price volatility of the bond. 3. **VaR calculation**: Since VaR measures potential losses at a given confidence level, the put feature reduces the worst-case losses, thereby decreasing the VaR. 4. **Asymmetric payoff**: The puttable bond has an asymmetric payoff profile - limited downside but unlimited upside (when interest rates fall). This asymmetry reduces the tail risk that VaR measures. Therefore, the puttable feature will **decrease** the VaR of the bond, making option B the correct answer.

Author: LeetQuiz Editorial Team