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A Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions

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  • Min Park
  • Steven P. Clark

Abstract

We develop a reduced-form valuation model for bonds with make-whole call provisions. Informed by the structural differences between callable bonds with fixed call prices and callable bonds with make-whole call provisions, we specify our reduced-form model so that the call spread depends inversely on the default intensity. Using a sample of make-whole callable bonds, we estimate the parameters of our model using the extended Kalman filter and compare the performance of our model with the performance of a well-known reduced-form model for fixed-price callable bonds.

Suggested Citation

  • Min Park & Steven P. Clark, 2015. "A Reduced-Form Model for Valuing Bonds with Make-Whole Call Provisions," Applied Mathematical Finance, Taylor & Francis Journals, vol. 22(6), pages 499-521, December.
    • Handle: RePEc:taf:apmtfi:v:22:y:2015:i:6:p:499-521
    DOI: 10.1080/1350486X.2015.1095643
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    Cited by:

    1. Afik, Zvika & Jacoby, Gady & Stangeland, David & Wu, Zhenyu, 2019. "The make-whole and Canada-call provisions: A case of cross-country spillover of financial innovation," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 61(C), pages 120-127.
    2. Brown, Scott & Powers, Eric, 2020. "The life cycle of make-whole call provisions," Journal of Corporate Finance, Elsevier, vol. 65(C).

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