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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Longstaff (2004) does not mention callability as a feature of these bonds.
As with callability, extendibility provides managers with greater timing flexibility.
To control for the risks arising from callability, a dummy variable (CALLABLE) is used, where a value of 1 indicates a callable issue and a value of 0 indicates a non-callable issue.
Therefore, these risk-premiums do not suffer from confounding effects arising from callability of bonds.
Maturity and callability significantly affect bond yields after controlling for bond ratings.
Callability constraints are: V [less than or equal to] max(Call Price, aS); [SIGMA] = 0 if V [greater than or equal to] Call Price.
The data contain information on monthly prices (quote and matrix), accrued interest, coupons, ratings, callability, and returns on all investment-grade corporate and government bonds for the period from January 1987 to December 1996.
Callability was very common prior to the 1990s, and was used in an average of more than 75% of all debt issues.
When structuring its financing, a firm must make decisions on all the relevant aspects of its debt, including leverage, maturity, callability, priority, and placement.
Time to callability is denoted by [Tau], at which point the preferred stock becomes callable with fixed call price, [Kappa].
Thus, empirical research that relies heavily on default risk and maturity to explain the prevalence of call provisions is not able to assess the importance of the separate agency theories of callability.
Two measures of the agency costs of debt are discussed here: bond callability and a firm's cumulative profitability.