Callability


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Callability

Feature of a security that allows the issuer to redeem the security prior to maturity by calling it in, or forcing the holder to sell it back.

Callability

A provision in an indenture that allows a bond to be redeemed before maturity. Callability allows the bond to be called at the discretion of the issuer, within certain limits. When the bond is called, the bondholder receives the par value (or sometimes slightly more) and does not receive any more coupons. Callable bonds are issued to allow the issuers to hedge against interest rate risk. That is, if interest rates fall significantly, they can call the bond and issue a new bond at a lower interest rate, reducing their liabilities. However, to protect the bondholder, most callable bonds also include call protection, which prevents the bonds from being called for a certain period of time and thereby guarantees the current interest rate for that time.
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Maturity and callability significantly affect bond yields after controlling for bond ratings.
The correlations between callability and the yields on T-bills, 10-year Treasury bonds, and Baa debt are 61%, 69%, and 68%, respectively.
Since the SDC does not consistently report data on callability, puttability, and call and put dates until 1976, the sample period for the fraction of callable issues, fraction of puttable issues, and effective maturity is January 1976-April 2001.
1] Just prior to callability, the preferred stock's price is given by h(V) if it is out of the money (i.
In Figure 1, we plot the initial condition, the final state, and the numerical solution for deferred callability as lines 1, 2, and 3, respectively.
No significant bias due to time to callability (TIME) is evident (t = -0.
We conclude that the three agency theories of callability do not have sufficient empirical support to retain their position as the most prominent explanations of the use of call options on corporate bonds.
Figure 1 shows the distribution of maturity and callability for investment-grade and speculative-grade bonds.
These strong correlations among default risk, maturity, and callability are consistent with agency theories of call provisions.
Two measures of the agency costs of debt, bond callability, CALL, and cumulative profitability, CP, are used.
The contract-specific variables, [Mathematical Expression Omitted], are the common features that accompany variable-rate instruments, such as callability, cap, floor, adjustment frequency, put option, and conversion features.
CALL = dummy variable for callability (1 = callable, 0 = otherwise)