The Choice Among Non-Callable and Callable Bonds

This paper examines the choice and the pricing of callable and non-callable bonds. The popularity of callable and non-callable bonds is significantly related to the economic environment. Callable bonds are also more likely to be issued via a shelf prospectus and are more likely to be issued by banks than non-callable bonds. Evidently, firms that prefer to issue callable bonds seek to take advantage of their ability to process economic information but must pay a premium relative to straight bonds for the call feature. Firms that issue callable bonds do not consistently display the characteristics associated with severe agency problems.