Make-whole callable bonds :Covenant yield premium insights

This paper presents an empirical analysis on U.S. callable defaultable bonds whosecontracts include a make-whole call provision. Our first objective is the test of a covenanteffect on bond price. Comparing two samples of 323 make-whole call bonds and759 non callable bonds from 133 identical firms, we provide evidence that make wholecall bonds offer better returns than their equivalent non callable. Our study also focuseson the explanatory potential of growth opportunities to indorse the existence of makewholecallable bonds. A comparision is also displayed with 70 regular callable bondsextraced from 37 firms. Furthermore, we observe that contrary to traditional call provisions,make-whole ones are rarely exercised, a behaviour that seems difficult to explainwith call prices, frequently overcome by bond prices.