The Case for Indexing a Bond's Call Price

This paper considers an indexed call provision as an alternative to the standard fixed-price call provision contained in most corporate debt. It is shown that the indexed call provision can be constructed so that it is neutral to bondholders and therefore costless to the corporation, except for transaction costs. The major advantage of the proposed alternative is an increase in the firm's refunding flexibility. The indexed call provision eliminates the need for a "no call period" and substantially reduces the complexity and cost of refunding discounted debt. Besides this, all the benefits that have been attributed to the usual fixed-price call provision are retained.