Make-whole callable bonds :
Covenant yield premium insights
Résumé
This paper presents an empirical analysis on U.S. callable defaultable bonds whose
contracts include a make-whole call provision. Our first objective is the test of a covenant
effect on bond price. Comparing two samples of 323 make-whole call bonds and
759 non callable bonds from 133 identical firms, we provide evidence that make whole
call bonds offer better returns than their equivalent non callable. Our study also focuses
on the explanatory potential of growth opportunities to indorse the existence of makewhole
callable bonds. A comparision is also displayed with 70 regular callable bonds
extraced from 37 firms. Furthermore, we observe that contrary to traditional call provisions,
make-whole ones are rarely exercised, a behaviour that seems difficult to explain
with call prices, frequently overcome by bond prices.
contracts include a make-whole call provision. Our first objective is the test of a covenant
effect on bond price. Comparing two samples of 323 make-whole call bonds and
759 non callable bonds from 133 identical firms, we provide evidence that make whole
call bonds offer better returns than their equivalent non callable. Our study also focuses
on the explanatory potential of growth opportunities to indorse the existence of makewhole
callable bonds. A comparision is also displayed with 70 regular callable bonds
extraced from 37 firms. Furthermore, we observe that contrary to traditional call provisions,
make-whole ones are rarely exercised, a behaviour that seems difficult to explain
with call prices, frequently overcome by bond prices.