To call or not to call?: optimal call policies for callable U.S. Treasury bonds

Robert R. Bliss and Ehud I. Ronn

Economic Review, 1995, vol. 80, issue Nov, 14 pages

Abstract: Until 1984, the U.S. Treasury typically issued its long-term bonds in callable form. A number of these securities, totaling $93.8 billion in face value, remain outstanding. After a call protection period, usually five years prior to maturity, the Treasury can call the bonds but must give prior notification of intent to call. This article develops a decision rule, which takes account of the prior notification requirement, when it is optimal to call such bonds. ; The decision of whether to call is based on the current level of interest rates and their volatility. For a call to be optimal for the Treasury, interest rates must be sufficiently low (relative to the bond's coupon) and the potential benefits of waiting--on the chance of even lower interest rates--should be insufficient to compensate for the costs of continuing to pay the higher coupon rate for another six months. After developing these ideas, the authors use a numerical example to demonstrate their application. They conclude that, at least in recent years, the Treasury has called bonds optimally. The model they use, which is also applicable to agency, corporate, and municipal callable bonds, specifies conditions under which the Treasury should call outstanding callable bonds in the future.

Keywords: Government; securities (search for similar items in EconPapers)
Date: 1995
References: Add references at CitEc
Citations: View citations in EconPapers (3)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedaer:y:1995:i:nov:p:1-14:n:v.80no.6

Ordering information: This journal article can be ordered from

Access Statistics for this article

More articles in Economic Review from Federal Reserve Bank of Atlanta Contact information at EDIRC.
Bibliographic data for series maintained by Meredith Rector ().