scholarly journals Why Callable Bonds Are not Called When the Market Price Reaches the Call Price: A Duration Argument

2015 ◽  
Vol 11 (1) ◽  
pp. 90
Author(s):  
Samih Antoine Azar
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Financial Risk ◽  
Market Price ◽  
Interest Rate Risk ◽  
Underlying Assumption ◽  
Callable Bonds ◽  
Rate Risk ◽  
Lower Interest Rate ◽  
First Time

It is a fact that firms do not call callable bonds when bond prices reach for the first time the call price. This paper provides an original explanation for this behavior by resorting to duration analysis. It is known that, ceteris paribus, a bond with a higher coupon, or a higher yield, has a lower duration that a bond with a lower coupon, or a lower yield. This implies that the bond that is to be called has a lower duration than the bond that replaces it. A lower duration signifies a lower interest rate risk. The firm with a callable bond will wait for market interest rates to fall further in order to equalize durations and bear the same risk. The underlying assumption is that by equalizing durations the firm keeps facing the same financial risk. In this case, it is the same amount of interest rate risk. Consequently, there are no changes in the capital structure, no redistribution effects on other debt claims, and financial leverage is unaffected. The paper provides illustrations on this active law by considering four callable bonds, with different remaining maturities, and each one with a set of two different call prices.

scholarly journals The Relationship Between Large Banks Investment In Available-For-Sale Securities And The Interest Rate Risk Of Their Securities

2010 ◽  
Vol 26 (3) ◽  
Author(s):  
Shilo Lifschutz
Keyword(s):  
Risk Management ◽  
Interest Rate ◽  
Interest Rates ◽  
Financial Risk ◽  
Fair Value ◽  
Interest Rate Risk ◽  
Empirical Examination ◽  
Rate Risk ◽  
The Interest Rate ◽  
The Relationship

This study presents an empirical examination of the relationship between large banks’ investment in available-for-sale securities (AFS) and the interest rate risk of their securities. It concentrates on the years, 1997-2000, when interest rates were relatively stable and regulatory capital was not affected by the unrealized holding gains and losses on AFS securities under Statement of Financial Accounting Standards No. 115. The two main findings of the study, having controlled for the interest risk position of the bank (exclusive of securities effect) and other risk management and economic considerations, are: (1) AFS securities’ ratio (to securities or to total assets) is positively related to the interest rate risk of securities; (2)a change in the AFS securities ratio is positively related to the change in the interest rate risk of securities.  These findings may well prove to be significant to supervisors of banks considering they are in charge of monitoring the effect of fair value accounting regulations on the financial risk management in banks.

scholarly journals Who Bears Interest Rate Risk?

2018 ◽  
Vol 32 (8) ◽  
pp. 2921-2954 ◽  
Author(s):  
Peter Hoffmann ◽  
Sam Langfield ◽  
Federico Pierobon ◽  
Guillaume Vuillemey
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Banking Sector ◽  
Balance Sheet ◽  
Interest Rate Risk ◽  
Cross Sectional ◽  
Net Worth ◽  
Loan Rate ◽  
Rate Risk ◽  
European Banking

Abstract We study the allocation of interest rate risk within the European banking sector using novel data. Banks’ exposure to interest rate risk is small on aggregate, but heterogeneous in the cross-section. Contrary to conventional wisdom, net worth is increasing in interest rates for approximately half of the institutions in our sample. Cross-sectional variation in banks’ exposures is driven by cross-country differences in loan-rate fixation conventions for mortgages. Banks use derivatives to partially hedge on-balance-sheet exposures. Residual exposures imply that changes in interest rates have redistributive effects within the banking sector. Received October 31, 2017; editorial decision August 30, 2018 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Measuring Interest Rate Risk with Embedded Option Using HPL-MC Method in Fuzzy and Stochastic Environment

2020 ◽  
Vol 2020 ◽  
pp. 1-13
Author(s):  
Enlin Tang ◽  
Wei Du
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Interest Rate Risk ◽  
Extended Model ◽  
Term Structure Model ◽  
Continuous Innovation ◽  
Liability Management ◽  
Rate Risk ◽  
Embedded Options

Under the condition of continuous innovation of financial derivatives and marketization of interest rate, interest rates fluctuate more frequently and fiercely, and the measurement of interest rate risk also attracts more attention. Under the premise that the fluctuation of interest rate follows fuzzy stochastic process, based on the option characteristics of financial instruments with embedded option, this paper takes effective duration and effective convexity as tools to measure interest rate risk when embedded options exist, tries to choose CIR extended model as term structure model, and uses the Monte Carlo method for hybrid low deviation sequences (HPL-MC) to analyze the prepayment characteristics of MBS, a representative financial instrument with embedded options, when interest rates fluctuate; on this basis, the effectiveness of effective duration management of interest rate risk is demonstrated with asset liability management cases of commercial banks.

Basel I to Basel III: Impact of Credit Risk and Interest Rate Risk of Banks in India

2018 ◽  
Vol 17 (1_suppl) ◽  
pp. S83-S111 ◽  
Author(s):  
Noor Ulain Rizvi ◽  
Smita Kashiramka ◽  
Shveta Singh
Keyword(s):  
Interest Rate ◽  
Credit Risk ◽  
Interest Rates ◽  
Banking System ◽  
Interest Rate Risk ◽  
Theoretical Background ◽  
Capital Adequacy ◽  
Basel Iii ◽  
Rate Risk ◽  
Net Interest Margin

The study explores the theoretical background of Basel III and investigates the drivers of interest rate risk and credit risk of banks in various parlances, namely, pre and post the financial crisis, phases of implementation and ownership on a sample of 36 listed banks in India. The findings indicate that the high capital adequacy requirement (CAR) exhibits a positive relation with gross non-performing assets (GNPAs) and net interest margin (NIM). This is perhaps one of the major drawbacks of Basel implementation, which may become a cause of lower GDP in the future as explained in the findings of the literature. Originality/value: This article is perhaps the first attempt of its kind to empirically examine the bank-specific, macroeconomic variables and link it with the Basel implementation in the Indian banking system for the time period 2002–2015. This study endeavours to enhance the existing empirical research in the field and give insights into the role of various factors on GNPAs and interest rates (with regards to Indian banks).

scholarly journals INTEREST RATE RISK IN TURKISH FINANCIAL MARKETS ACROSS DIFFERENT TIME PERIODS

2014 ◽  
Vol 16 (3) ◽  
pp. 183-204
Author(s):  
Durmus Özdemir ◽  
Harald Schmidbauer
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Stock Exchange ◽  
Risk Measure ◽  
Generalized Pareto Distribution ◽  
Interest Rate Risk ◽  
Negative Effects ◽  
Good Tool ◽  
Generalized Pareto ◽  
Rate Risk

A Measuring the risk associated with interest rates is important since it is beneficial in taking measures before negative effects can take place in an economy. We obtain a risk measure for interest rates by fitting the generalized Pareto distribution (GPD) to positive extreme day-to-day changes of the interest rate, using data from the Istanbul Stock Exchange (ISE) Second Hand Bond Market, namely Government Bond interest rate closing quotations, for the time period 2001 through 2009. Although the use of the GPD in the context of absolute interest rates is well  ocumented in literature, our approach is different insofar and contributes to the literature as changes in interest rates constitute the target of our analysis, reflecting the idea that risk arises from abrupt changes in interest rate rather than in interest rate levels themselves. Our study clearly shows that the GPD, when applied to interest rate changes, provides a good tool for interest rate risk assessment, and permit a period-specific risk evaluation.  Keyword: Interest rate risk; covered interest parity; Turkey; generalized Pareto distributionJEL Classification: G1; C1

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