Economics, Econometrics and Finance
8 years ago

Firms Delay Calling Bonds to Manage Interest Rate Risk Efficiently.

2 views
International Journal of Business and Management
Why Callable Bonds Are not Called When the Market Price Reaches the Call Price: A Duration Argument
Samih Antoine Azar

Paper Summary

Firms don't call bonds when prices hit the call price because the called bond has lower risk due to shorter duration. They wait for interest rates to drop further to equalize risk with the new bond. This keeps financial risk the same without changing capital structure or leverage.

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