Noncallable Bonds Research Articles

Explaining yield spreads of Swiss canton bonds: An empirical investigation

This paper analyses the rather large yield spreads of the debt of Swiss cantons (defined as the difference between yield of canton and federal bonds) using data for bonds issued between 1990 and 1998. A regression analysis with and without correction for selection bias of 84 non-callable bond issues over nine years yields the following results. First, fiscal indicators like debt and primary balance exhibit no statistically significant effect on yield spreads. Second, institutional factors, in particular the ability to launch financial referendums, are important determinants of yield spreads. Third non-German speaking cantons and cantons with large cities have to pay higher interest on their debt even if we control for fiscal and institutional factors.

Planning your own Debt; A Stochastic Programming Approach to Mortgage Backed Security Analysis in a Two-Factor Interest Rate Model

In Denmark many homeowners/borrowers manage their debt very actively. The individual borrower faces a number of non-trivial decisions. He has to decide whether to use adjustable rate loans where the debt is refinanced on a yearly basis or the more traditional fixed rate 20- or 30-year annuities (or some combination). The annuities have embedded options; first there is a call-feature, second there is a delivery option. We use a stochastic two-factor term structure model (calibrated to market prices and volatilities of non-callable bond and prices of callable bonds) and formulate the problem of optimal (with respect to some concave criterion) debt management (subject to investor specific conditions) as a multistage stochastic programming problem that can be solved with standard software. The formulation makes it easy to incorporate both the inherently path-dependent aspects and the optimal policy aspects. Preliminary results indicate that the advice/rules of thumb used by banks/financial institutions are reasonable, albeit best suited for more aggressive (or large) investors, for whom the delivery option is of some value, while it appears that suitably calibrated one-factor models may produce results similar to the two-factor model.

Convex Structure of the Constrained Least Square Problem for Estimating the Forward Rate Sequence

We will show that the constrained least square problem proposed in Konno and Takase [5] for estimating the forward rate sequence by using the market prices of default-free non-callable coupon bonds is in fact a convex minimization problem under more general conditions than those assumed in the subsequent paper by the same authors [6]. Consequently, the constrained least square approach can generate a smooth and accurate forward rate sequence very fast by standard convex minimization algorithms.

Treasury Yields and Corporate Bond Yield Spreads: An Empirical Analysis

This paper empirically examines the relation between the Treasury term structure and spreads of investment grade corporate bond yields over Treasuries. I find that noncallable bond yield spreads fall when the level of the Treasury term structure rises. The extent of this decline depends on the initial credit quality of the bond; the decline is small for Aaa-rated bonds and large for Baa-rated bonds. The role of the business cycle in generating this pattern is explored, as is the link between yield spreads and default risk. I also argue that yield spreads based on commonly-used bond yield indexes are contaminated in two important ways. The first is that they are "refreshed" indexes, which hold credit ratings constant over time; the second is that they usually are constructed with both callable and noncallable bonds. The impact of both of these problems is examined.

"Putting" Away Bond Risk: An Empirical Examination of the Value of the Put Option on Bonds

There is an extensive literature dealing with the effect of call provisions on corporate bond yields [5, 6, 7, 9, 11, 12, 16, 17] and municipal bond yields [3, 4, 13, 14, 18]. Because the call provision enables borrowers to refinance bonds during periods of low interest rates and exposes the lender to a call risk, callable bonds typically provide higher yields than similar noncallable bonds. Other studies have examined the level of this call premium over the interest rate cycle [1, 2, 11, 12]. This protection against unfavorable interest rate movements has traditionally been available only to the borrower. Lenders historically have not been protected by the inclusion of floating rate provisions or provisions in a bond. A put bond permits the lender to (or sell) the bond back to the borrower, at par, under certain conditions. This paper examines a relatively new financial instrument: the put or option tender bond. Section II