Optimal suboptimality
Citi quants present a term-structure model for callable bonds' work
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Bhaavit Agrawal and David L. Li study the optionality in callable bonds and propose a quantitative framework to analyse exercise decisions by issuers. They argue that the issuer’s decision on calling a bond is based on its ability and willingness to reissue new debt. While the issuer’s credit spread certainly contains some of this information (namely, the cost of reissuance), it is missing other important elements in the issuer’s exercise decision-making. A new
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