The model presented in this paper argues that an entrant can use
noncallable convertible debt to avoid predation in entry deterrence games.
This price-process model is identical to the one used by Murphy (1991), except that implied volatility is used to estimate the variation in
noncallable debt values whereas historical variance was used in the 1991 study because implied volatility figures did not exist in the pre-1984 portion of that study's sample.
The values of Treasury securities are often summarized by the yield curve, which plots the yields of all
noncallable securities against their maturities.
Perhaps the best way to understand the impact of including a call option on a municipal bond is to look at the value of a callable bond as if it were the value of a
noncallable bond minus the value of the embedded call.
Because the callability feature introduces bias in the risk premium of a subordinated debt, this study used only
noncallable debt risk premium.
CallProtection is equal to one for
noncallable convertibles, which constitute 21.80% of the sample.
At the 5-year maturity, there were only two
noncallable securities with close to 5 years remaining to maturity, so those two rather than three securities were used to measure yields at that maturity.
(39) Fixed-rate,
noncallable, semiannual coupon, long-term (ten-to-twenty-year) bonds were the most commonly issued instruments during the sample period.
The fraction of public bonds that are callable is the number of callable public bond issues outstanding divided by the total number of callable and
noncallable public bond issues outstanding.
The study focused exclusively on newly issued,
noncallable debt securities with maturities greater than one year.
The qualifying subordinated debt would be 5-year,
noncallable, fixed rate debt, and there would be a minimum of two issues a year, with the two qualifying issues being at least two months apart.
These are
noncallable securities issued on a regular basis in larger sizes than the agencies' typical issues.
