Explanation

A puttable bond gives the bondholder the right (but not the obligation) to sell the bond back to the issuer at a predetermined price before maturity. This put option acts as a form of downside protection for the bondholder.

Impact on VaR:

• Reduced downside risk: The puttable feature limits the bond's potential price decline because if interest rates rise significantly (causing bond prices to fall), the bondholder can exercise the put option and sell the bond at the predetermined strike price.
• Lower potential losses: Since the maximum loss is capped by the put option's strike price, the Value at Risk (VaR) will be lower compared to a similar bond without the puttable feature.
• Asymmetric payoff profile: The puttable bond has limited downside risk but retains upside potential, making its risk profile less risky than a standard bond.

Therefore, the puttable feature decreases the VaR of the bond because it reduces the potential losses in adverse market conditions.