Final answer:
Putable bonds exhibit positive convexity, which offers investors protection against interest rate increases, as the bondholder can force the issuer to repurchase the bond before maturity. High-yield bonds offer higher interest rates to compensate for the risk of default, but putable bonds specifically may have lower yields due to the added protection.
Step-by-step explanation:
Putable bonds, also known as put bonds, allow the bondholder the right to force the issuer to repurchase the security at specified times before maturity, at a fixed price.
The convexity of a putable bond is positive. This means that the bond's duration changes less with a large change in yield, compared to a bond with the same duration but without the put option.
As yields rise and bond prices fall, the put option becomes more valuable, because the bondholder can choose to sell the bond back to the issuer.
Conversely, as yields fall, the existing high-yield the bond offers makes it attractive relative to new bonds, thus its price increases. The benefit of putable bonds is that they offer investors protection against interest rate rises and their associated price falls.