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

    Authors

    M. Tewari; A. Byrd;P. Ramanlal

    Comments

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    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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