We consider two types of bonds: 1) a bond with a make-whole call provision and 2) an option-free or noncallable bond.
With a noncallable bond, if a situation arises where the firm must retire the bond early, the firm will normally attempt a bond tender offer.
Perhaps the best way to understand the impact of including a call option on a municipal bond is to look at the value of a callable bond as if it were the value of a noncallable bond minus the value of the embedded call.
where CB is the value of a callable bond, NCB is the value of a noncallable bond, and OVB is the option value of the embedded call.
To control for term effects and market movements not associated with the call,(5) we selected a matched-control sample of independent noncallable bonds with a maturity date on or immediately following the call date.
The coupon range for noncallable bonds is slightly larger than that of callable bonds, although the standard deviation is substantially smaller.
Numerical Solutions to the Valuation Equation for Noncallable Bonds
The parameter values chosen are the same as those for noncallable bonds.
Initially, suppose that the firm issues a two-period default-free noncallable bond.
is determined in Equation (9) as the coupon payment which would make the marginal investor of the previous section indifferent between purchasing a callable or a noncallable bond at time 0.
Of the three, only the Kish and Livingston study has a sufficient number of noncallable bonds
to estimate a zero/one equation on the inclusion of a call option, although they are forced to overweight the sample of noncallable bonds
The new issue includes $125 million 5-1/2 percent noncallable bonds
The new issue includes $300 million 6 3/8 percent five-year noncallable bonds
due 2003 and $300 million 7 3/8 percent 10-year noncallable bonds
The new issue includes $150 million 5 3/4 percent noncallable bonds
due July 1, 1998, $100 million 6 3/4 percent noncallable bonds
due July 1, 2005 and $250 million 7 5/8 percent bonds, noncallable for 10 years, due July 1, 2025.
15, the noncallable bonds
will mature serially on Dec.