Corporate Call Policy for Nonconvertible Bonds

Prepayment risk on callable bonds: theory and test

“…Furthermore, we find that the call notice period does not seem to impact on the timing of the call. These two findings confirm earlier results obtained by King and Mauer (2000). By contrast with them, we do find, however, that the presence of restrictive covenants deters firms from calling the bond late.…”

“…We finally compute a 120 × 109 array of average risk premiums for every issuer and every month. 11 In their empirical study of corporate bond call policies, King and Mauer (2000) also observe more late calls than early calls.…”

“…In sum, this strand of literature argues that the objective function of the issuing company when it comes to calling the bond may well be broader than the refinancing motive. The empirical literature on calls of non-convertible bonds is scarce, however, Vu (1986) and King and Mauer (2000) do report a wide dispersion in call behaviors and conclude that corporate call policies do not seem to be captured by a single motive.…”

Bond Games

“…Following Ingersoll (1977b), Asquith (1995) showed that most callable convertible debt is redeemed by corporations in a timely fashion. Conversely, King and Mauer (2000) found that 86 percent of their sample of callable nonconvertible bonds were called well after the bond's market price exceeded its call price. Again, focusing on convertible debentures, Constantinides (1984), Emanuel (1983), and Constantinides and Rosenthal (1984) analyzed optimal conversion strategies for owners of convertible bonds.…”

Call Protection in Mortgage Contracts

“…Using somewhat different techniques, Jordan, Jordan, and Jorgensen (1995) estimated that only about 7% of treasury bonds implied negative call option values, after adjusting for bidask spreads. In the corporate bond sector, King and Mauer (2000) found that the vast majority of issuers delay their calls by an average of 27 months from the date when the call option is first exercisable. Evidence is mixed on the extent to which the call feature is priced into the initial offering yields, though King (2002) reports a "general practice of setting the coupon rate on a callable issue 20-70 basis points higher than a similar noncallable issue".…”