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- Title
OPTIMAL TERMS OF THE CALL PROVISION ON A CORPORATE BOND.
- Authors
Marshall, William; Yawitz, Jess B.
- Abstract
The analysis demonstrates that the differential tax effects on borrower and lender create a bias toward inclusion of a call provision. All else being equal, corporate borrowers will always issue callable bonds since the call always has positive value. Call provisions are more likely to be observed (1) when rates are expected to fall, and (2) the more uncertain are future rates. The optimal call price is a function of all these factors, but can be determined relatively easily given specific assumptions. The properly chosen call price maximizes the expected gain to the lender. The "loser" is not the borrower, but rather the government since it is assumed that bonds are priced in order to leave the borrower indifferent between the callable and non-callable bonds. The gain to the firm from the inclusion of a call provision is the government's expected loss in tax revenues.
- Publication
Journal of Financial Research, 1980, Vol 3, Issue 2, p203
- ISSN
0270-2592
- Publication type
Academic Journal
- DOI
10.1111/j.1475-6803.1980.tb00050.x