Callable Bonds, Interest-Rate Risk, and the Supply Side of Hedging

57 Pages Posted: 9 Mar 2004

See all articles by Levent Guntay

Levent Guntay

Federal Deposit Insurance Corporation (FDIC)

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School

Haluk Unal

University of Maryland - Robert H. Smith School of Business

Date Written: July 2004

Abstract

We show that firms attach call options to debt issues to manage interest-rate risk and characterize the empirical determinants of this hedging decision. Our results affirm that firms' hedging choices are explained by theories of hedging demand, but more importantly, provide novel evidence that the supply side of hedging is equally important. In contrast to studies based on OTC derivatives, small firms are more likely to hedge in our setting, in which supply-side barriers are absent. We show that there is a secular, robust shift away from callable bonds in the 1990s, when supply-side barriers to hedging declined. This shift is more likely when firms disclose derivatives usage disclosed in their 10-K's

Keywords: Hedging, Risk Management, Callable Bonds

JEL Classification: G30, G32

Suggested Citation

Guntay, Levent and Prabhala, Nagpurnanand and Unal, Haluk, Callable Bonds, Interest-Rate Risk, and the Supply Side of Hedging (July 2004). Available at SSRN: https://ssrn.com/abstract=472521 or http://dx.doi.org/10.2139/ssrn.472521

Levent Guntay

Federal Deposit Insurance Corporation (FDIC) ( email )

550 17th Street NW
Washington, DC 20429
United States
202-8986819 (Phone)

Nagpurnanand Prabhala

The Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
+1 410 234 4532 (Phone)

Haluk Unal (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States
301-405-2256 (Phone)
301-405 0359 (Fax)

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