Non-Callable Bond

(redirected from Non-Callable Bonds)

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.
References in periodicals archive ?
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).
The sample has 150 callable bonds and 54 non-callable bonds. Other bond features such as amount raised, maturity, coupon rate, and bond rating were collected as well.
Most noteworthy, the binary call feature variable (i.e., 1 for callable bonds and 0 for non-callable bonds) is negatively related to the bond rating, and its coefficient is statistically significant with a p-value close to zero.
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.

Full browser ?