Refunding efficiency

A generalized approach

Andrew J. Kalotay, Deane Yang, Frank J. Fabozzi

Research output: Contribution to journalArticle

Abstract

Refunding efficiency, a measure of the optimality of a refunding decision, is widely used in the call exercise decision for agency, corporate and municipal bonds. The original definition of efficiency assumes that the refunding bond is optionless. However, in practice, the refunding bond is often callable. We show that the commonly used method of incorporating the value of the refunding bond's call option into the efficiency calculation can lead to paradoxical results, and then suggest a new definition of refunding efficiency that overcomes this problem.

Original languageEnglish (US)
Pages (from-to)141-146
Number of pages6
JournalApplied Financial Economics Letters
Volume3
Issue number3
DOIs
StatePublished - May 2007

Fingerprint

Call option
Corporate bonds
Optimality
Exercise
Municipal bonds

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Refunding efficiency : A generalized approach. / Kalotay, Andrew J.; Yang, Deane; Fabozzi, Frank J.

In: Applied Financial Economics Letters, Vol. 3, No. 3, 05.2007, p. 141-146.

Research output: Contribution to journalArticle

Kalotay, Andrew J. ; Yang, Deane ; Fabozzi, Frank J. / Refunding efficiency : A generalized approach. In: Applied Financial Economics Letters. 2007 ; Vol. 3, No. 3. pp. 141-146.
@article{122d72a2a08b47c9a11fe93b32e2e084,
title = "Refunding efficiency: A generalized approach",
abstract = "Refunding efficiency, a measure of the optimality of a refunding decision, is widely used in the call exercise decision for agency, corporate and municipal bonds. The original definition of efficiency assumes that the refunding bond is optionless. However, in practice, the refunding bond is often callable. We show that the commonly used method of incorporating the value of the refunding bond's call option into the efficiency calculation can lead to paradoxical results, and then suggest a new definition of refunding efficiency that overcomes this problem.",
author = "Kalotay, {Andrew J.} and Deane Yang and Fabozzi, {Frank J.}",
year = "2007",
month = "5",
doi = "10.1080/17446540600771076",
language = "English (US)",
volume = "3",
pages = "141--146",
journal = "Applied Financial Economics Letters",
issn = "1744-6546",
publisher = "Routledge",
number = "3",

}

TY - JOUR

T1 - Refunding efficiency

T2 - A generalized approach

AU - Kalotay, Andrew J.

AU - Yang, Deane

AU - Fabozzi, Frank J.

PY - 2007/5

Y1 - 2007/5

N2 - Refunding efficiency, a measure of the optimality of a refunding decision, is widely used in the call exercise decision for agency, corporate and municipal bonds. The original definition of efficiency assumes that the refunding bond is optionless. However, in practice, the refunding bond is often callable. We show that the commonly used method of incorporating the value of the refunding bond's call option into the efficiency calculation can lead to paradoxical results, and then suggest a new definition of refunding efficiency that overcomes this problem.

AB - Refunding efficiency, a measure of the optimality of a refunding decision, is widely used in the call exercise decision for agency, corporate and municipal bonds. The original definition of efficiency assumes that the refunding bond is optionless. However, in practice, the refunding bond is often callable. We show that the commonly used method of incorporating the value of the refunding bond's call option into the efficiency calculation can lead to paradoxical results, and then suggest a new definition of refunding efficiency that overcomes this problem.

UR - http://www.scopus.com/inward/record.url?scp=34248577716&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=34248577716&partnerID=8YFLogxK

U2 - 10.1080/17446540600771076

DO - 10.1080/17446540600771076

M3 - Article

VL - 3

SP - 141

EP - 146

JO - Applied Financial Economics Letters

JF - Applied Financial Economics Letters

SN - 1744-6546

IS - 3

ER -