Callable Bonds, Reinvestment Risk, and Credit Rating Improvements: Role of the Call Premium

Tewari, Manish; Byrd, Anthony K.; Ramanlal, Pradipkumar

doi:10.2139/ssrn.2140171

Cited by 6 publications

(11 citation statements)

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“…According to Tewari et al (2015), the call premium is included in the investment grade bonds to counter the call risk for the investors when the interest rates are expected to fall and is included in the high yield bonds to counter the call risk due to a ratings improvement.…”

Section: Literature Reviewmentioning

confidence: 99%

“…We use the following issue specific and the firm specific variables in the empirical analysis following the approach in Tewari et al (2015) and Tewari (2018).…”

Section: Variablesmentioning

confidence: 99%

“…The Ratings variable captures the S&P assigned issue rating to each bond issue on the numerical scale with 16 being the highest and the 7 being the lowest, for the investment grade bonds. The approach is identical as in Tewari et al (2015). Kidwell, Marr, and Thompson (1984) use Moody's rating in their study.…”

Section: Variablesmentioning

confidence: 99%

“…One such provision that attempts to achieve this objective is the call option. Presence of call option in bonds gives the firms the right to call the investment grade bonds at a specific price and time when the rates are expected to fall and call the high yield bonds when the yields are expected to fall due to the ratings improvement (Tewari, Byrd, and Ramanlal, 2015). On the other hand, the call provision presents higher reinvestment rate risk for the investors due to a call prior to the maturity (Winn and Hess, 1959).…”

Section: Introductionmentioning

confidence: 99%

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Analysis of Floating Rate Bonds and the Firm Characteristics

Tewari

Ramanlal²

2021

IJFBS

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We examine the security and firm characteristics of a sample of 2,027 non-convertible investment grade floating rate securities (bonds) issued by the US based firms between 1980 and 2018. These bonds pay a coupon based on short term reference rate, such as fed funds rate, plus a fixed quoted margin. Considerable number (81.6%) of these issues are between 1992 and 2007 signifying floating rate as an effective mechanism to mitigate firm’s interest rate risk when the rates are high and expected to fall. A positive and significant abnormal return (CAR = 0.27%), in the event window surrounding issue date, provides strong evidence that the floating rate is viewed as a less restrictive provision as compared to the call option. Majority of the issues (89.3%) are non-callable since the floating rate mitigates interest rate risk for the issuing firm. Lack of put provision in these bonds (in only 7.35% of the sample issues) signifies no significant investor concerns of falling bond prices. Regression analysis reveals that firms with growth options and with higher leverage experience positive CAR due to the financial flexibility these bonds provide. Firms with higher level of information asymmetry benefits less from issuing these securities since most of these bonds (90.13%) are issued at par therefore, the price is not likely to carry information content that mitigates information asymmetry between the firms and the investors.

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Section: Literature Reviewmentioning

confidence: 99%

“…We use the following issue specific and the firm specific variables in the empirical analysis following the approach in Tewari et al (2015) and Tewari (2018).…”

Section: Variablesmentioning

confidence: 99%

Section: Variablesmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Analysis of Floating Rate Bonds and the Firm Characteristics

Tewari

Ramanlal²

2021

IJFBS

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“…Firms may further desire to obtain more cash than otherwise and pursue a debt policy that tends to be conservative. Other implications of FF relate to how these firms are able to design hybrid securities such as bonds that are callable and bonds that are convertible (Tewari et al, 2015). The important first-order factor in making financial investment decisions is to what extent firms are FF.…”

Section: Dynamics Of Firm-level Investment Financing and Investment Efficiencymentioning

confidence: 99%

Financing Constraints and Investment Efficiency in Canadian Real Estate and Construction Firms: A Stochastic Frontier Analysis

2021

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This article models the behavior of 179 listed and unlisted real estate and construction firms (RECFs) in Canada to study how financial constraints impact the investment efficiency of these real estate firms during the 2004–2020 period. Investment efficiency is interpreted here as the ability and ease of a firm to convert investment opportunities into actual investments. The results show that Canadian RECFs are strongly dependent on two sources of financing: equity financing and debt financing. Equity financing helped ease financing constraints due to a cash flow increase but was unlikely to decrease the uncertainty of follow-up financing of investments of these companies. This study constructed an investment efficiency index (IEI) for all 179 RECF firms. The results showed an investment rate loss of approximately 62% of the RECF firms due to financing constraints during the above period. The IEI of RECFs in Canada has demonstrated a descending pattern, and the investment efficiency level slipped from 0.47 to 0.40 from 2004 to 2020. Furthermore, a regional analysis demonstrates that compared with the RECFs located in Ontario, the investment efficiency indices of RECFs in Quebec and British Columbia were more volatile. Small RECFs demonstrated a very steady trend in investment efficiency during the sample period, which was completely different from the patterns displayed by large and medium RECFs.

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Analyzing interactive call, default, and conversion policies for corporate bonds

Liu

Dai

Zhou

et al. 2022

Journal of Futures Markets

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This paper studies the timings of interactive call and conversion decisions made by bond issuers and holders, respectively, due to the presence of different embedded options. We develop a risk-neutral-valuation-based game option model featuring bondholder-stockholder conflicts of interest. The presence of conversion (call) options possessed by the bondholders (issuers) accelerates the call (conversion) decisions. Granting bondholders additional put options further hastens call decisions and hence conversion decisions in response to call accelerations. Our empirical studies are consistent with past call policy research and support our interactive exercise analyses that explain the rationales behind early call and conversion phenomena.

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Callable Bonds, Reinvestment Risk, and Credit Rating Improvements: Role of the Call Premium

Cited by 6 publications

References 0 publications

Analysis of Floating Rate Bonds and the Firm Characteristics

Analysis of Floating Rate Bonds and the Firm Characteristics

Financing Constraints and Investment Efficiency in Canadian Real Estate and Construction Firms: A Stochastic Frontier Analysis

Analyzing interactive call, default, and conversion policies for corporate bonds

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