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

Tewari, Manish; Byrd, Anthony K.; Ramanlal, Pradipkumar

doi:10.1016/j.jfineco.2014.09.011

Cited by 27 publications

(10 citation statements)

References 29 publications

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“…Firms set the call prices of non-convertible fixed coupon issues at either the par value or at a premium equal to the par value plus the annual coupon amount. Tewari et al (2015) find that the firms compensate investors with a call premium in the case of an early call to mitigate investor's refunding risk. They contend that call premium is a more effective contracting mechanism since it is the cost firm pays only when the call occurs.…”

Section: Call Premiummentioning

confidence: 97%

“…Korkeamaki and Moore (2004) argue that the firms engineer the strength of call protection to allow sufficient flexibility in the timing of future investments. Tewari et al (2015) argue that the covenants that weaken call protection are likely to increase refunding risk for the investors from an early call due to the falling interest rates or credit ratings improvement. The firms engineer call provision parameters to counter these risks.…”

Section: Call Provisionmentioning

confidence: 99%

“…While, the majority of the IG issues are concentrated around the period 2007-2012 (period around the financial crisis). The level of interest rates is one of the determinants of the choice of maturity (short ≤ 20 years or long > 20 years) of bonds (Tewari et al 2015) and the likelihood of the bonds being called (Kish and Livingston 1992). In order to control for the level of interest rates at the bond issuance, we follow the methodology of low and high interest rate regimes as in (Tewari et al 2015).…”

Section: Annual Distribution Of Hy and Ig Bondsmentioning

confidence: 99%

“…Design of call provisions allows the firm to mitigate the agency conflict due to the investor's reinvestment risk (call due to declining interest rates (Kish and Livingston 1992)), ratings-upgrade risk (call due to credit ratings improvement in high-risk firms (Diamond 1991)), and growth-options risk (call due to realization of growth options in low-risk firms (Bodie and Taggart 1978)). The presence of strong call protection, call premium, or both signal high likelihood of a call while, weak call protection, call at par, or both signal weak likelihood of a call (Tewari et al 2015). (Tewari et al 2015) contend that regardless of the reason(s) for the call, the likelihood of a call increases as the firm's refinancing risk decreases.…”

Section: Introductionmentioning

confidence: 99%

“…The presence of strong call protection, call premium, or both signal high likelihood of a call while, weak call protection, call at par, or both signal weak likelihood of a call (Tewari et al 2015). (Tewari et al 2015) contend that regardless of the reason(s) for the call, the likelihood of a call increases as the firm's refinancing risk decreases. Essentially, HY firms characterized by small size, high leverage, and presence of opacity; face lower refinancing risk from significant effect of ratings upgrade thereby, present high ratings-upgrade risk regardless of the level of interest rates.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

Tewari

2018

Business: Theory and Practice

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We analyse security design parameters of 1,115 high yield (HY) and investment grade (IG) event risk covenants (ERC) protected issues between 1986 and 2012 from the agency conflict perspective. We find positive and significant stock price reaction to the issuance of HY but not the IG issues. Although, majority of these issues carry a call provision, we find significant design differences in the call provision between HY and IG issues. We find that HY issues provide strong call protection to mitigate the risk of a call due to ratings upgrade, compromising firm’s financial flexibility; resulting financial distress is mitigated by the ERC. IG issues provide weak call protection to fully exploit growth options however, role of ERC is not apparent. We also find evidence of increase in managerial entrenchment due to the presence of ERC in HY firms however, reduction in agency cost of debt supersedes cost of managerial entrenchment.

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Section: Call Premiummentioning

confidence: 97%

Section: Call Provisionmentioning

confidence: 99%

Section: Annual Distribution Of Hy and Ig Bondsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

See 3 more Smart Citations

Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

Tewari

2018

Business: Theory and Practice

Self Cite

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Analyzing interactive call, default, and conversion policies for corporate bonds

Liu

Dai

Zhou

et al. 2022

Journal of Futures Markets

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This paper studies the timings of interactive call and conversion decisions made by bond issuers and holders, respectively, due to the presence of different embedded options. We develop a risk-neutral-valuation-based game option model featuring bondholder-stockholder conflicts of interest. The presence of conversion (call) options possessed by the bondholders (issuers) accelerates the call (conversion) decisions. Granting bondholders additional put options further hastens call decisions and hence conversion decisions in response to call accelerations. Our empirical studies are consistent with past call policy research and support our interactive exercise analyses that explain the rationales behind early call and conversion phenomena.

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Sovereign bonds' risk‐based heterogeneity

Georgoutsos,

Migiakis

2024

Int. J Fin Econ

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Are sovereign risk premia subject to heterogeneous effects from their drivers, associated with the risk class each sovereign bond belongs to? In the paper at hand, effects on sovereign bond risk premia stemming from macroeconomic, fiscal, and volatility factors, are examined by considering the classification of sovereign riskiness. Panel data estimation techniques are used, for 30 countries, with data in quarterly frequency for the period 2001Q1 to 2019Q4. Sovereign spreads are found to be subject to heterogeneous effects associated with their credit ratings; spreads on sovereign bonds considered low‐risk increase with higher growth rates and inflation, while spreads on highly risky bonds decrease with higher growth rates and are more sensitive to idiosyncratic and global volatility. Primary fiscal surpluses indeed lower spreads but cannot counterbalance the effects of volatility episodes and the prospects for low growth. Our results provide support for countercyclical fiscal policies, suggesting that spreads can be expected to be reduced by primary surpluses, under the condition that the economy expands and market volatility is low. Our main findings are robust to various alternative setups, samples, and control variables such as central banks' asset purchases.

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

Cited by 27 publications

References 29 publications

Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

Event Risk Covenants, Design Parameters and Agency Issues: A Comparative Study of High Yield Versus Investment Grade Bonds

Analyzing interactive call, default, and conversion policies for corporate bonds

Sovereign bonds' risk‐based heterogeneity

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