Call Me Maybe: Corporate Bond Prices Upon Missed Call Opportunities

Abstract

In a sample of discretely callable corporate bonds, we find excess returns of approximately 40 b.p. realized on the release of the issuer’s decision to call or not to call. The bonds that should have been called (in-the-money bonds) but are not called contribute the most to the bond price jump. We attribute the jump to the revaluation of an embedded bond call option due to a missed exercise opportunity. Investors sell callable bonds prior to the release of the issuer’s decision and later buy back not-called, in-the-money bonds, leaving the price jump in bond dealers’ pockets.

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