Which bond type tends to be more attractive during falling interest rate environments?

In a falling interest rate environment, putable bonds tend to be more attractive to investors. This is primarily due to the embedded option that allows the bondholder to sell the bond back to the issuer at a predetermined price, typically at par, before its maturity. As interest rates decline, bond prices increase, but having the ability to redeem the bond early provides additional flexibility and potential profit for investors.

Investors are less likely to exercise the put option when interest rates are falling because they would be forfeiting the opportunity to benefit from increased bond values. Instead, they may prefer to hold onto their bonds, as they are likely experiencing capital appreciation, securing the value of their investment even more.

In comparison, callable bonds, while they offer potentially higher yields to compensate for the call risk, become less attractive as interest rates fall because issuers are likely to call the bonds to refinance at lower rates, depriving investors of future interest payments.

Convertible bonds allow bondholders to convert their bonds into equity at a predetermined rate, which may be favorable in rising equity markets rather than specifically attractive during falling interest rates.

Zero-coupon bonds, while valuable due to their pricing structure that discounts the entire interest amount to be paid at maturity, do not offer the