To call or not to call?: optimal call policies for callable U.S. Treasury bonds
AbstractUntil 1984, the U.S. Treasury typically issued its long-term bonds in callable form. A number of these securities, totaling $93.8 billion in face value, remain outstanding. After a call protection period, usually five years prior to maturity, the Treasury can call the bonds but must give prior notification of intent to call. This article develops a decision rule, which takes account of the prior notification requirement, when it is optimal to call such bonds. ; The decision of whether to call is based on the current level of interest rates and their volatility. For a call to be optimal for the Treasury, interest rates must be sufficiently low (relative to the bond's coupon) and the potential benefits of waiting--on the chance of even lower interest rates--should be insufficient to compensate for the costs of continuing to pay the higher coupon rate for another six months. After developing these ideas, the authors use a numerical example to demonstrate their application. They conclude that, at least in recent years, the Treasury has called bonds optimally. The model they use, which is also applicable to agency, corporate, and municipal callable bonds, specifies conditions under which the Treasury should call outstanding callable bonds in the future.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Atlanta in its journal Economic Review.
Volume (Year): (1995)
Issue (Month): Nov ()
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Ben-Ameur, Hatem & Breton, Michele & Karoui, Lotfi & L'Ecuyer, Pierre, 2007. "A dynamic programming approach for pricing options embedded in bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 31(7), pages 2212-2233, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.