The mispricing of callable U.S. treasury bonds: A closer look

Was the emergence of the international gold standard expected? Evidence from Indian Government securities

“…In our case, the features of the call render it extremely difficult to value even nowadays. It is a ''Bermudan call'' since it can be exercised at several dates providing appropriate notice is given (Jordan et al, 1998). Furthermore the underlying asset is a perpetuity which means that the option has an infinite life.…”

“…Even for bonds with embedded calls traded nowadays direct valuation is not the norm. The standard approach is to compare the prices of these bonds with the price of a similar non-callable bond (Longstaff, 1992;Jordan et al, 1998). The difference then represents the value of the call.…”

Does deliverability enhance the value of U.S. Treasury bonds?

“…Several approaches are common in the literature for constructing these synthetic bond prices. In this study, the coupon STRIPS replicating portfolio, or "all-STRIPS" method, is used as a model-free estimate of a Treasury bond's fundamental value as in Carayannopoulos (1995) and Jordan, Jordan, and Kuipers (1998). Because long-term deliverable Treasury bonds and Treasury STRIPS share coincident payment dates, it is always possible to construct an all-STRIPS synthetic bond price via simple cash-flow matching methods, thus avoiding the interpolation error and measurement noise induced by some alternate approaches (e.g., Shea, 1984).…”

“…Cash market bid price quotes for each bond, along with bid yield quotes for the associated Treasury coupon STRIPS, are obtained from Bear Stearns, Inc. via their data vendor, Street Software Technology; these are the same data reported daily in The Wall Street Journal and many online financial databases. 6 Following Jordan et al (1998), accrued interest for the bonds and quote prices for the STRIPS are calculated using next-day settlement procedures, in a manner consistent with regular market convention. Figure 1 depicts the cross-sectional sample mean, by eventday, of estimating Equation (2) for each of the 11 exiting deliverable bonds in Table I.…”

Are embedded calls valuable? Evidence from agency bonds

“…3 More recently, as of the end of 2004, the total borrowing by 1 There are numerous other studies on the mispricing of treasury securities. For example, see Carayannopoulos (1995), Cornell and Shapiro (1989), Jordan et al (1998), and Jordan et al (2000). 2 The Treasury Department's debt buyback proposal was presented to the House Ways and Means Committee in September of 1999 and put to effect starting March 9, 2000.…”