bond coupon payment C, which satisfies Equation (3), at a par value of B = 100, is computed to be 15.
The model-generated credit spreads are compared to observed at-issue credit spreads of both make-whole call and noncallable
bonds in Section IV.
The model presented in this paper argues that an entrant can use noncallable
convertible debt to avoid predation in entry deterrence games.
For the price-process model, the volatility of default-free, noncallable
debt prices is assumed to be proportional to maturity (Murphy, 1991), and the implied volatilities on 30-year debt are estimated by applying the Black (1976) option pricing model to the nearest-to-the-money call options on the second nearest CBT T-bond futures contract listed in the Wall Street Journal on each GNMA pricing date.
where CB is the value of a callable bond, NCB is the value of a noncallable
bond, and OVB is the option value of the embedded call.
The risk-free rates of Treasury securities identical in maturity to each BHC noncallable
debt were collected from Moody's Bond Records.
This translates to an upper bound in the market value of the underlying noncallable
bond, which would limit the benefit of increased volatility.
Callable zeroes, however, will not experience the same price appreciation as noncallable
zeroes due to the negative price impact of the call option.
bonds, the premium is amortized over the bond's life.
To control for term effects and market movements not associated with the call,(5) we selected a matched-control sample of independent noncallable
bonds with a maturity date on or immediately following the call date.
Securities are defined as common stock and noncallable
convertible preferred stock.