Callable Bond Revisited

In light of the dramatic changes in the callable bond market, we re-examine the determinants of callable bonds. Using data from 1980-2003, we find that callable bonds are often issued by firms with both information asymmetry and underinvestment problems. However, risk-shifting does appear to be a major factor. Furthermore, we find that interest rate hedging is an important factor for investment grade bonds and when interest rates are high, but not so for below-investment grade bonds or when rates are low.