Calling Nonconvertible D bt and the Problem of Related Wealth Transfer Effects

Francis A. Longstaff is Associate Professor An often-cited rule in corporate finance is that a firm should call a bond as soon as of Finance at UCLA, Los Angeles, CA. Bruce the bond's market price equals its call price. But, in fact, many callable bonds sell for A. Tuckman is Vice President at Salomon more than their call prices. One explanation is that the implicit assumption that calls Brothers Inc. are executed so as to leave capital structure unchanged fails to hold in practice. This paper examines the impact of capital structure changes on optimal call policy and