How Non-Par Call Schedules Affect Callable Bond Valuation
Summary
A callable bond gives its issuer the right to redeem the bond on specified dates at scheduled call prices. When a call price differs from par, the schedule is described as non-par. Because the issuer owns this option and the investor is short it, a callable bond is worth less, and generally yields more, than an otherwise comparable non-callable bond.
The explanation recommends valuing the call feature with an interest-rate model and accounting for it through option-adjusted spread. A simpler comparison uses yields on similar bonds, though that approach depends on finding a suitable benchmark. For municipal bonds, the answer suggests that par calls after a set period are common and that a benchmark made up of bonds with matching non-par call terms would improve comparability. It offers no numerical example or detailed treatment of how a particular call schedule changes spread or duration, and the municipal-market comments are qualified by the respondent’s limited expertise.
Key ideas
- A non-par call schedule specifies redemption prices that differ from par.
- The issuer’s call option reduces the value of the bond to its investor.
- Option-adjusted spread analysis can incorporate the value of the embedded call option.
- Yield comparisons are more informative when the benchmark bonds have similar call terms.
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# what is non par call curve ? # what is non par call curve ? What is no par call curve in terms of muni securities ? Can anyone explain how does it affect spread and duration and why is it used while evaluating securities ? ## Answer by Alex C (score 1) https://quant.stackexchange.com/a/34590 A callable bond can be called at specified dates; if the company decides to call it they will pay you a specified Call Price. The call prices are not necessarily equal to par (100) they may be 100+X and if so we refer to it as "non-par" call. The bond contract contains a schedule of these Call Dates and Call prices. Obviously the possibility of a call has a major impact on the evaluation of a security. The best way to analyze this is to consider that the ability to call is an Option which the company has bought and which the investor has sold. The value of the bond is lower than the value of a non-callable bond (and the yield is higher) because of this. Given a mathematical model of interest rates the exact value of this option can be calculated and the OAS or Option Adjusted Spread can be found that takes the value of this option into account. A simpler method is to compare the yield of this bond to the yield of other similar bonds. I am not a Muni expert but I believe the most common call arrangement for Munis is "callable after 10 years at Par". Most of the bonds included in the MMD index are presumably of this type. If you had an index of non-par callable bonds, it would be preferable since it would consist of bonds that are more comparable to the bond you are analyzing.
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