What is Tender Option Bond?

A Tender Option Bond (TOB) is a financial instrument that allows investors to leverage municipal bonds while providing a mechanism for liquidity. In a TOB structure, a trust holds a portfolio of municipal bonds, and investors purchase tender option bonds issued by the trust. These bonds typically feature a tender option, enabling investors to sell the bonds back to the trust at par after a specified period, thus offering a degree of safety and flexibility. TOBs are often used by institutional investors to manage interest rate risk and enhance yield.