Journal of Economics and Finance

, Volume 16, Issue 3, pp 89–100 | Cite as

The pricing of callable preferred stock

  • Clifford F. Thies
  • Steven C. Isberg


In this study, the authors use both the Black/Scholes European option model and the Barone-Adesi/Whaley American option model to estimate call option values implicit in seasoned callable preferred stock issues. Consistent with the finding that call features increase bond yields, a significant relationship is found between estimated option values and discounts of these securities’ market prices from their estimated income values. However, the size of the discount is only a fraction of what would be predicted by the American option model. Specifically, the market does not appear to take the “early exercise premium” into account. Furthermore, this discount seems to be isolated to in-the-money call features that have evolved to their final call price. Thus, incorporation of a call feature into a security’s indentures, with a deferment period and an initial premium call price, appears to represent a pure gain for the issuing corporation.


Call Option American Option Call Feature Corporate Bond Option Price Model 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Barone-Adesi, Giovani, andRobert E. Whaley. “Efficient Analytic Approximation of American Option Values.”Journal of Finance 42 (June 1987): 301–320.CrossRefGoogle Scholar
  2. Black, Fischer, andMyron S. Scholes. “The Pricing of Options and Corporate Liabilities.”Journal of Political Economy 81 (May–June 1973): 637–654.CrossRefGoogle Scholar
  3. Bodie, Zvi, andRobert A. Taggart. “Future Investment Opportunities and the Value of the Call Provision.”Journal of Finance 33 (September 1978): 1187–2000.CrossRefGoogle Scholar
  4. Elton, Edwin J., andMartin J. Gruber. “Dynamic Programming Applications in Finance.”Journal of Finance 26 (May 1971): 473–506.CrossRefGoogle Scholar
  5. Goldberg, Michael A. “The Determinants of Interest Rates.” In Dennis E. Logue, ed.,Handbook of Modern Finance. New York: Warren, Gorham and Lamont, 1984.Google Scholar
  6. Hess, Jr.,Arleigh P., andWillis Winn.The Value of the Call Privilege. Philadelphia: University of Pennsylvania, 1962.Google Scholar
  7. Kish, Richard J., and Miles Livingston. “The Value of the Call Option on Corporate Bonds.” Paper presented at the 1990 Eastern Finance Association meeting.Google Scholar
  8. Merton, Robert C. “A Rational Theory of Option Pricing.”Bell Journal of Economics and Management Science 4 (Spring 1973): 141–183.CrossRefGoogle Scholar
  9. Moody’s Bond Record. Various issues.Google Scholar
  10. Myers, Stewart C. “Discussion.”Journal of Finance 26 (May 1971): 538–539.CrossRefGoogle Scholar
  11. NYSE Daily Price Record. Various issues.Google Scholar
  12. Pye, Gordon. “The Value of the Call Option on a Bond.”Journal of Political Economy 74 (April 1966): 200–205.CrossRefGoogle Scholar
  13. Spivey, Michael F. “The Cost of Including a Call Provision in Municipal Debt Contracts.”Journal of Financial Research 12 (Fall 1989): 203–216.Google Scholar

Copyright information

© Springer 1992

Authors and Affiliations

  • Clifford F. Thies
    • 1
  • Steven C. Isberg
    • 1
  1. 1.University of BaltimoreBaltimore

Personalised recommendations