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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.