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A Closer Look at Calls

An Institutional Investor Sponsored White Paper

Although high yield bonds and bank loans can provide investors with attractive yields, an issuer’s option to call these instruments increases the challenge of accurately analyzing the accompanying risks. In this paper, Prudential Fixed Income discusses the value of modeling the embedded optionality in high yield bonds and bank loans: why it has become more relevant in the current environment, scenarios where it can be particularly useful, and how such a model can improve relative value analysis within the leveraged finance markets.
This paper is the second in a two-part series, the first of which discusses the framework Prudential Fixed Income uses to account for the additional risk of callable high yield bonds and bank loans. The framework considers both interest rates and spread movements,as well as issuer defaults. 

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