An Empirical Examination of Call Option Values Implicit in U.S. Corporate Bonds

This study examines call option values implicit in U.S. corporate bonds from 1973 to 1994. The average call option value is 2.25% of par. Over time, call values remain close to zero until one year before the first call date, reach a maximum at the beginning of the callable period, and slowly decrease thereafter. The determinants of call values are examined. The results show that bonds of firms that have called aggressively in the past have larger call values. Additionally, lower interest rates, smaller slopes of the yield curve, and higher interest rate volatility lead to larger call values. The results also show that call values increase with time to maturity in the callable period but decrease with time to maturity in the call protection period. Lower rated, higher coupon bonds have larger call values. There is no evidence that the length of the call protection period affects call values.