Non-Callable Bond

Non-Callable Bond

A bond whose holder is not permitted to exchange it with the issuer in return for its face value. Non-callable bonds may be either traded or held to maturity. A non-callable bond should not be confused with a nonnegotiable security.
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The structure of the transaction is as follows: The first tranche consists of EGP 203m, 13-month non-callable bond with a variable yield of 40 basis points (bps) over the net after tax return on 182-day Egyptian treasury bills (T-Bills).
Since the investor faces the risk of an uncertain stream of cash flows, the common market practice is to demand a higher yield in a callable bond than in a non-callable bond in order to compensate the higher risk caused by the embedded call options in a specific issue.
In common practice, the credit and liquidity risk of any common non-callable bond is determined by the additional yield spread paid by that bond when compared to the yield of a risk-free bond with a similar maturity date (i.e.
Finding a proxy for a non-callable bond issue with the same coupon and maturity date comparable to the issue that is being valued.
Thus, a mortgage effectively is composed of a long-term non-callable bond plus an embedded call option that gives the mortgager the right (but not the obligation) to buy back (call) the bond at par.
A complete discussion is beyond the scope of this article, but I would like to make an important point about bonds with embedded options or call features, and non-callable bonds. As we are fully aware, bond prices move in the opposite direction of interest rates.
In this study, the authors test whether callable bonds have lower agency costs of debt than non-callable bonds. The paper also examines whether an explicit contractual restriction on risk incentive-triggered transactions reduces the agency costs of debt.
That is, the authors empirically test whether callable bonds have lower agency costs of debt than non-callable bonds. Also examined is whether an explicit restriction on risk incentive-based transactions effectively reduces the agency costs of debt.
[X.sub.4i] = 1 for callable bonds and 0 for non-callable bonds (contracting variable).
Regardless of a bond's maturity, McGregor suggests buying top-rated (AAA or AA), non-callable bonds. That is, avoid bonds that permit the issuer to buy them back if interest rates fall, in which case you'd have to reinvest at lower yields.
Of course, there is a cost: The interest rates on 10-year callable bonds for Freddie Mac are about 100 basis points above the cost of comparable non-callable bonds. The reduction in F&F profits, however, would be less than the reduction created by an explicit portfolio size limit.
They use a theoretical, tax-timed, bond-pricing model and show that a comparison of callable bonds with non-callable bonds that mature on the first call date provides a valuation for an implied put option.

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