OPTIMAL BOND CALL POLICIES UNDER TRANSACTIONS COSTS

David C. Mauer

46 citations0/0 files storedThe Journal of Financial Research

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Stochastic processes and financial applications Corporate Finance and Governance Credit Risk and Financial Regulations

Abstract

Abstract In this paper I analyze the effects of refunding transactions costs on the firm's optimal call policy. Refunding transactions costs cause the firm to delay calling a bond when its market value first reaches the call price. This effect causes the price path of a callable bond to be a locally concave function of the interest rate, reaching a maximum price above the call price. Comparative static results show that the magnitude of the premium above the call price is an increasing function of transactions costs. An empirical test on a sample of nonconvertible bonds supports the model's transactions costs prediction.

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References

1980A RATIONALE FOR DEBT MATURITY STRUCTURE AND CALL PROVISIONS IN THE AGENCY THEORETIC FRAMEWORK 1981A Re-Examination of Traditional Hypotheses about the Term Structure of Interest Rates 1977A contingent-claims valuation of convertible securities 1993Stocks, bonds, bills, and inflation yearbook 1980An Analysis of Variable Rate Loan Contracts 1984Optimal bond trading with personal taxes 1977Savings bonds, retractable bonds and callable bonds 1978FUTURE INVESTMENT OPPORTUNITIES AND THE VALUE OF THE CALL PROVISION ON A BOND

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