The choice among non-callable bonds and make whole, claw back and otherwise ordinary callable bonds

Abstract

This paper seeks to explain determinates of the choice and the pricing of various types of callable and non-callable bonds. We find that the popularity of different types of callable and non-callable bonds is significantly related to the economic environment. In addition, the popularity of claw back bonds appear to be driven by agency considerations, make whole bonds by the debt overhang problem, ordinary callable bonds by the need by banks to deal with interest rate changes and non-callable bonds by the need to raise funds as cheaply as possible. All else equal, firms pay a higher offer spread for the flexibility to call a claw back bond early via a new share offering whereas issuers of make whole bonds are rewarded with a lower offer spread for restricting calls to circumstances that does not expropriate bondholder wealth.