TAILIEUCHUNG - Financial Institutions Center - Callable Bonds and Hedging

The term of a bond ends on the bond’s maturity date, when the issuer repays to the investor the face amount listed on the bond. When a bond is held to maturity, its face amount is repaid in full. Before maturity, however, the value of a bond often fluctuates. These continual changes in bond prices are influenced by many factors, including interest rate movements, supply of and demand for bonds, changes in the financial health of bond issuers, returns offered by other investments, and the maturity date of a bond. Price fluctuations will be addressed more fully on pages 12 and 13 | Wharton Financial Institutions Center Callable Bonds and Hedging by Levent Guntay . Prabhala Haluk Unal 02-13 The Wharton School University of Pennsylvania The Wharton Financial Institutions Center The Wharton Financial Institutions Center provides a multi-disciplinary research approach to the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center s research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty visiting scholars and . candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community please let us know of your interest. Franklin Allen Co-Director Richard J. erring Co-Director The Working Paper Series is made possible by a generous grant from the Alfred P. Sloan Foundation Callable Bonds and Hedging Levent Guntay N. R. Prabhala Haluk Unal R. H. Smith School of Business R. H. Smith School of Business R. H. Smith School of Business University of Maryland University of Maryland University of Maryland College Park MD 20742 College Park MD 20742 College Park MD 20742 301 345-1174 301 405 2165 301 405 2265 lguntay@ nprabhal@ hunal@rhsmith. umd. edu First Version August 2000 This Version February 2002 Keywords Hedging Risk Management Callable Bonds. JEL Classifications G30 G32. Corresponding author. We thank many of our colleagues and especially to Yiorgos Allayannis and Catherine Schrand for extensive comments on an .

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