A Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions |
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Authors: | Min Park |
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Institution: | College of Business, Albany State University, Albany, GA 31705, USA |
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Abstract: | AbstractWe develop a reduced-form valuation model for bonds with make-whole call provisions. Informed by the structural differences between callable bonds with fixed call prices and callable bonds with make-whole call provisions, we specify our reduced-form model so that the call spread depends inversely on the default intensity. Using a sample of make-whole callable bonds, we estimate the parameters of our model using the extended Kalman filter and compare the performance of our model with the performance of a well-known reduced-form model for fixed-price callable bonds. |
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Keywords: | Callable bonds make-whole call provision reduced-form model |
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