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

Min Park and Steven Clark ()

Applied Mathematical Finance, 2015, vol. 22, issue 6, 499-521

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.

Date: 2015
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DOI: 10.1080/1350486X.2015.1095643

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