Callable Bonds, Reinvestment Risk, And Credit Rating Improvements: Role Of The Call Premium

Keywords

Agency conflict; Callable debt; Corporate finance; Financing; Structured provisions

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.

Publication Date

2-1-2015

Publication Title

Journal of Financial Economics

Volume

115

Issue

2

Number of Pages

349-360

Document Type

Article

Personal Identifier

scopus

DOI Link

https://doi.org/10.1016/j.jfineco.2014.09.011

Socpus ID

84921532402 (Scopus)

Source API URL

https://api.elsevier.com/content/abstract/scopus_id/84921532402

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