A par swap (with beginning value of zero) can be replicated by a portfolio of noncallable
bonds with the same par value and maturity as the swap.
However, convertible bonds are often noncallable
for a significant period of time following the issue.
The SALG bonds he studies are noncallable
and have essentially zero default risk.
Assume that a noncallable
, risk-free bond with par value of $1 pays a continuous fixed annual coupon rate c.
The following example is added after paragraph 120 and before Example 3: Example 2A: Fair Value Hedge of the LIBOR Swap Rate in a $100,000 BBB-Quality 5-Year Fixed-Rate Noncallable
The REMIC rules require the defeasance collateral to consist of direct, noncallable
and nonredeemable securities or certificates of deposit that are issued by either the United States of America or any of its instrumentalities or guaranteed as to principal and interest by the U.S.
* The sub-debt must be five-year, noncallable
, fixed rate debt.
The model discounts the cash flows at interest rates determined by the full term structure of Treasury bond yields, assumes a truncated normal distribution for the value of noncallable
debt (with volatility being related to maturity), and uses both a threshold prepayment function related to refinancings and an autonomous prepayment function related to nonrefinancing factors such as moving and default.
Some of the outstanding bonds are callable securities, which may be redeemed by the Treasury before their maturity; however, only noncallable
securities have been issued since 1985.
The following section will discuss how the value (and yield) of a callable bond differs from a noncallable
"Qualified securities" generally means common stock, or certain noncallable
preferred stock convertible into common, issued by a domestic corporation that has no stock outstanding tradable on an established securities market.
Through CS First Boston Inc., the publishing and broadcasting company sold $250 million in 10-year noncallable
notes at 7 5/8 0/0 and $150 million in 30-year bonds at 8 1/4 0/0.