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Calling Nonconvertible Debt and the Problem of Related Wealth Transfer Effect


  • Francis A. Longstaff
  • Bruce A. Tuckman


An often-cited rule in corporate finance is that a firm should call a bond as soon as the bond's market price equals its call price. But, in fact, many callable bonds sell for more than their call prices. One explanation is that the implicit assumption that calls are executed so as to leave capital structure unchanged fails to hold in practice. This paper examines the impact of capital structure changes on optimal call policy and presents empirical evidence consistent with the results of that explanation.

Suggested Citation

  • Francis A. Longstaff & Bruce A. Tuckman, 1994. "Calling Nonconvertible Debt and the Problem of Related Wealth Transfer Effect," Financial Management, Financial Management Association, vol. 23(4), Winter.
  • Handle: RePEc:fma:fmanag:longstaff94

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    Cited by:

    1. Pascal François & Sophie Pardo, 2015. "Prepayment risk on callable bonds: theory and test," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 38(2), pages 147-176, October.
    2. Sarkar, Sudipto & Hong, Gwangheon, 2004. "Effective duration of callable corporate bonds: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 499-521, March.
    3. Liu, Liang-Chih & Dai, Tian-Shyr & Wang, Chuan-Ju, 2016. "Evaluating corporate bonds and analyzing claim holders’ decisions with complex debt structure," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 151-174.
    4. Y. D'Halluin & P. A. Forsyth & K. R. Vetzal & G. Labahn, 2001. "A numerical PDE approach for pricing callable bonds," Applied Mathematical Finance, Taylor & Francis Journals, vol. 8(1), pages 49-77.
    5. Marco Realdon, 2007. "Valuation of the Firm's Liabilities When Equity Holders Are Also Creditors," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5-6), pages 950-975.
    6. 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.

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