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Valuation of Callable Bonds Under Progressive Personal Taxes and Interest Rate Uncertainty

Author

Listed:
  • David C. Mauer
  • Amir Barnea
  • Chang-Soo Kim

Abstract

The principal focus of the analysis is on the valuation of a call provision on a bond in an environment wherein investors have progressive tax rates which positively covary with interest rates. Under the conditions of Miller's bond market equilibrium, it is shown that the decision to issue a callable bond is a negative sum game from the corporation's perspective. Empirical evidence on the extent to which tax rates and interest rates positively covary indicates that the tax effect analyzed here is likely to be economically significant.

Suggested Citation

  • David C. Mauer & Amir Barnea & Chang-Soo Kim, 1991. "Valuation of Callable Bonds Under Progressive Personal Taxes and Interest Rate Uncertainty," Financial Management, Financial Management Association, vol. 20(2), Summer.
  • Handle: RePEc:fma:fmanag:mauer91
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    Cited by:

    1. 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.
    2. Sarkar, Sudipto, 2001. "Probability of call and likelihood of the call feature in a corporate bond," Journal of Banking & Finance, Elsevier, vol. 25(3), pages 505-533, March.
    3. 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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