Title

Callable bonds, reinvestment risk, and credit rating improvements: Role of the call premium

Authors

Authors

M. Tewari; A. Byrd;P. Ramanlal

Comments

Authors: contact us about adding a copy of your work at STARS@ucf.edu

Abbreviated Journal Title

J. Financ. Econ.

Keywords

Corporate finance; Financing; Callable debt; Structured provisions; Agency conflict; DEBT MATURITY STRUCTURE; CORPORATE-DEBT; CONVERTIBLE BONDS; DETERMINANTS; INVESTMENT; PROVISIONS; Business, Finance; Economics

Abstract

We identify the call premium in nonconvertible callable bonds as an effective contracting provision to address agency conflict due to reinvestment risk and credit rating improvements. We analyze 4,495 bonds issued between 1980 and 2012. When interest rates are high, a majority of investment-grade issues and almost the entire subset with long maturities (> 20 years) include a call premium. When interest rates are low, virtually all investment-grade issues with long and short maturities are callable at par. High-yield issues are limited to short maturities. By about 4:1, they include a call premium regardless of interest rate levels. (c) 2014 Elsevier B.V. All rights reserved.

Journal Title

Journal of Financial Economics

Volume

115

Issue/Number

2

Publication Date

1-1-2015

Document Type

Article

Language

English

First Page

349

Last Page

360

WOS Identifier

WOS:000348968200007

ISSN

0304-405X

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