The decision to attach a call provision to municipal debt : determinants and cost

This dissertation examines determinants and cost of the inclusion of a call provision in general obligation municipal bond issues. Concerning determinants of the call inclusion decision the dissertation's findings suggest that the decision to include a call provision in municipal bond issues does not vary with expected movements in future interest rates. This finding suggests that issuers expect the market has assessed the potential for future profitable refunding and that the assessment is reflected in the size of the call risk premium. The results do suggest that the call provision is more likely to be included when credit market conditions become more uncertain and that large, more marketable issues are more likely to contain a call provision than small, less marketable issues. The results also show that a call provision is more likely to be attached to issues with longer average maturities and that issuers with higher debt burdens include a call provision in new issues more often than issuers who are less indebted.

Concerning the cost of the call provision, the dissertation also finds that municipal issuers must pay a call risk premium if they attach a call provision to debt issues. The results suggest that the size of the call risk premium varies inversely with expected changes in future interest rate movements and that the call risk premium increases as future interest rates become more uncertain. The results also suggest that large, more marketable issues are assessed a smaller call risk premium than small, less marketable issues.