Probability of call and likelihood of the call feature in a corporate bond
نویسندگان
چکیده
This paper suggests a new way of predicting the likelihood of a corporate bond being callable. We compute the probability that a bond, if callable, would actually be called within a certain period. We also hypothesize a positive relationship between this probability and the likelihood of the bond being issued with a call feature. Comparative static results yield the following empirical implications: the likelihood of a call feature should be an increasing function of coupon rate, corporate tax rate and leverage ratio, and a decreasing function of interest rate and ®rm risk (volatility). Tests with recently issued corporate bonds provide fairly strong support for the modelÕs predictions. Ó 2001 Elsevier Science B.V. All rights reserved. JEL classi®cation: G32
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