Are embedded calls valuable? Evidence from agency bonds

In general, call value exhibits a downward trend over time as the callable bond approaches maturity. Also, call value is inversely related to the level of interest rates. Interest rate drops are usually accompanied by an increase in call values. An analysis of the determinants of call values suggests the following conclusions. First, call values are negatively related to short-term interest rates and the slope of the yield curve, and positively related to coupon rate and remaining maturity. Second, bonds with a greater amount of call protection have smaller call values, which is in contrast with the finding in a previous study on corporate debt that call protection period has little effect on call value.