Premium
OPTIMAL BOND CALL POLICIES UNDER TRANSACTIONS COSTS
Author(s) -
Mauer David C.
Publication year - 1993
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1993.tb00124.x
Subject(s) - callable bond , bond , sample (material) , economics , value (mathematics) , monetary economics , function (biology) , microeconomics , transaction cost , business , econometrics , finance , computer science , chemistry , chromatography , machine learning , evolutionary biology , biology
In this paper I analyze the effects of refunding transactions costs on the firm's optimal call policy. Refunding transactions costs cause the firm to delay calling a bond when its market value first reaches the call price. This effect causes the price path of a callable bond to be a locally concave function of the interest rate, reaching a maximum price above the call price. Comparative static results show that the magnitude of the premium above the call price is an increasing function of transactions costs. An empirical test on a sample of nonconvertible bonds supports the model's transactions costs prediction.