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The Relative Tax Benefits of Alternative Call Features in Corporate Debt

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  • Brick, Ivan E.
  • Wallingford, Buckner A.

Abstract

This paper examines the differential tax treatment of the borrower and lender at the time debt is called as a potential explanation for the widespread existence of call provisions in corporate debt. This tax effect alone cannot explain the standard call feature because greater tax benefits may be derived for bonds callable at market prices. The equilibrium implications of the model allowing for tax arbitrage opportunities both at the corporate level and the individual level also are considered.

Suggested Citation

  • Brick, Ivan E. & Wallingford, Buckner A., 1985. "The Relative Tax Benefits of Alternative Call Features in Corporate Debt," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(1), pages 95-105, March.
    • Handle: RePEc:cup:jfinqa:v:20:y:1985:i:01:p:95-105_01
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    Cited by:

    1. Eric Powers, 2021. "The Optimality of Call Provision Terms," Management Science, INFORMS, vol. 67(10), pages 6581-6601, October.
    2. Correia, Maria do Rosário, 2008. "The choice of maturity and additional covenants in debt contracts: A panel data approach," Research in International Business and Finance, Elsevier, vol. 22(3), pages 284-300, September.
    3. Lim, Terence & Lo, Andrew W. & Merton, Robert C. & Scholes, Myron S., 2006. "The Derivatives Sourcebook," Foundations and Trends(R) in Finance, now publishers, vol. 1(5–6), pages 365-572, April.
    4. Maria do Rosario Correia & Scott C. Linn & Andrew Marshall, 2004. "An Empirical Investigation of Debt Contract Design: The Determinants of the Choice of Debt Terms in Eurobond Issues," FEP Working Papers 148, Universidade do Porto, Faculdade de Economia do Porto.

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